Chapter 6, Problem 4PA

(a)

Summary Introduction

Interpretation:Best Location needs to be determined using location analysis technique with the help of given data

Concept Introduction: The location analysis method helps in determining the optimal location to run a business efficiently.

Explanation of Solution

Given Information:

CP Location Analysis Data	Location 1	Location 2	Location 3	Location 4	Location 5
Fixed Costs	$ 75,000	$ 110,000	$ 95,000	$ 125,000	$110,000
Direct Material Cost/Unit	$ 4.14	$ 4.65	$ 5.05	$ 4.50	$ 4.50
Direct Labor Cost /Unit	$ 12.45	$13.80	$ 11.80	$ 15.60	$ 13.75
Overhead/unit	$ 2.25	$ 2.60	$ 1.95	$ 2.75	$ 2.10
Transportation Cost/Unit	$0.5	$ 0.65	$ 0.30	$0.83	$0.67

Estimated Annual Production: 30,000 units

The formula for calculating Direct Material cost, Direct Labor cost, Overhead Cost and

Transportation Cost is as follows:

Direct Material Cost = (Direct Material Cost/unit) x Estimated Annual Production

Direct Labor Cost = (Direct Labor Cost/unit) x Estimated Annual Production

Overhead Cost = (Overhead Cost/unit) x Estimated Annual Production

Transportation Cost = (Transportation Cost/unit) x Estimated Annual Production

Associated Costs	Location 1	Location 2	Location 3	Location 4	Location 5
Fixed Costs	$ 75,000	$ 110,000	$ 95,000	$ 125,000	$110,000
Direct Material Cost	$ 124,200	$ 139,500	$ 1,51,500	$ 135,000	$ 135,000
Direct Labor Cost	$ 373,500	$ 414,000	$ 354,000	$ 468,000	$ 412,500
Overhead	$ 67,500	$ 78,000	$ 58,500	$ 82,500	$ 63,000
Transportation Cost	$ 15,000	$ 19,500	$ 9,000	$ 24,900	$ 20,100
Total	$ 655,200	$ 761,000	$ 668,000	$ 835,400	$ 740,600

As per data calculated above, Location 1 provides the least cost.

(b)

Summary Introduction

Interpretation:Best Location needs to be determined using location analysis technique with the help of given data

Concept Introduction: The location analysis method helps in determining the optimal location to run a business efficiently.

Explanation of Solution

Associated Costs	Location 1	Location 2	Location 3	Location 4	Location 5
Fixed Costs	$ 75,000	$ 110,000	$ 95,000	$ 125,000	$110,000
Direct Material Cost	$ 124,200	$ 139,500	$ 1,51,500	$ 135,000	$ 135,000
Direct Labor Cost	$ 373,500	$ 414,000	$ 354,000	$ 468,000	$ 412,500
Overhead	$ 67,500	$ 78,000	$ 58,500	$ 82,500	$ 63,000
Transportation Cost	$ 15,000	$ 19,500	$ 9,000	$ 24,900	$ 20,100
Total	$ 655,200	$ 761,000	$ 668,000	$ 835,400	$ 740,600

As per the data calculated above, it can be clearly seen that the order of locations on basis of the lower to higher cost is Location 1 < Location 3 < Location 5 < Location 2 < Location 4.

The total cost associated with Location 2,4 and 5 is considerably high than location 1 and 3.

An appropriate range will be calculated below by comparing the Location 1 and 3.

Let’s assume the demand rate be x.

Total variable cost associated with Location 1 is = $ 19.34

Total Variable cost associated with Location 3 is = $ 19.10

So, the equation to calculate appropriate quantity will be:

  $\text{19}\text{.34x+ 75000 = 19}\text{.1x + 95000}$

By solving above equation, we get $\text{x = 83,333}\text{.33}$

It means that if demand rate is less than 83,333 units, then location 1 will be preferred and otherwise location 3 is chosen if demand exceeds 83,333 units.