There are three steps to locational
break-even analysis

1)
Determine the fixed and variable cost for each location

2)
Plot the costs for each location, with costs on the vertical axis of the
graph and

annual volume on the horizontal axis.

3)
Select the location that has the lowest total cost for the expected production
volume.

The following is an example
of how the locational break-even analysis is done mathematically.

- A company is considering
three locations for a new plant, Chicago, New York, and

Atlanta. Study has shown that fixed and variable costs for each site are as follows:

FIXED COSTS
VARIABLE COSTS

Chicago
$2500.00
$45 / UNIT

New York
$3500.00
$30 / UNIT

Atlanta
$2200.00
$40 / UNIT

The selling price of the product is $70 and the company wishes to find a location with an expected volume of 1200 per year.

The equation to be used for each is:

TOTAL COST = FIXED COSTS + VARIABLE COSTS (VOLUME)

When each is calculated, the total cost for each city is as follows:

Chicago
$56,500

New York
$39,500

Atlanta
$50,200

Based on these calculations
for a volume of 1200 per year, New York would have the lowest cost and
would therefore be the preferred location.