There are three steps to locational
1) Determine the fixed and variable cost for each location
Plot the costs for each location, with costs on the vertical axis of the
annual volume on the horizontal axis.
Select the location that has the lowest total cost for the expected production
The following is an example
of how the locational break-even analysis is done mathematically.
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:
New York $39,500
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.