Facility Location Part 3 by Anita LeePost Anita

Facility Location Part 3 by Anita Lee-Post © Anita Lee-Post

Break-even analysis 1. Determine the fixed and variable costs for each location. 2. Identify the indifference point for each pair of location alternatives. 3. Identify the ranges of output for which each location has the lowest total cost. 4. Select the location that gives the lowest cost for the design capacity of the new facility. © Anita Lee-Post

Break-even analysis example C&A Electronic is considering two possible sites for its new DVD plant. The annual fixed and variable costs for each site are: Location Fixed costs Variable costs Lexington $650, 000 $50/unit Wilmore $350, 000 $65/unit If annual demand for C&A’s DVD is expected to be 25, 000 units, which is the best location? © Anita Lee-Post

Break-even analysis example continued 1. Determine the fixed and variable costs for each location Let Q be the demand of DVD, TC(Lexington) = 650000 + 50 Q TC(Wilmore) = 350000 + 65 Q © Anita Lee-Post

Break-even analysis example continued 2. Identify the indifference points between each pair of location alternatives Let Q* be indifference demand, TC(Lexington) = TC(Wilmire) at Q* 650000 + 50 Q* = 350000 + 65 Q* Q* = 300000/15 = 20, 000 units © Anita Lee-Post

Break-even analysis example continued 3. Identify the ranges of output for which each location has the lowest total costs At Q = 0, TC(Lexington) = $650, 000 TC(Wilmore) = $350, 000 Q < 20, 000, Wilmore has the lowest total cost; Q > 20, 000 Lexington has the lowest total costs © Anita Lee-Post

Break-even analysis example continued © Anita Lee-Post

Break-even analysis example continued 4. Select the location that gives the lowest cost for the design capacity of the new facility If Q = 25, 000 Q > Q* (20, 000) Lexington should be chosen as the location for the new facility © Anita Lee-Post