Importance of Plant Location | A locational break-even analysis graphically and mathematically

Summary

This video on the Lolita Go Smarty Channel delves into the critical concept of plant location and its significance for businesses. It defines plant location as the strategic choice of site for setting up operations, emphasizing the need for minimal costs, market accessibility, and social benefits. The video introduces locational break-even analysis as a method to evaluate various site options based on fixed and variable costs. A practical example illustrates how to compute total costs and expected profits for different locations, highlighting Bowling Green as the most economical choice for the projected production volume. This analysis underscores the importance of informed decision-making in site selection.

Takeaways

• 🌍 Plant location involves choosing the best region and specific site for establishing a business or factory.
• 📉 An ideal plant location minimizes product costs while maximizing market share and reducing risks.
• 🔍 Locational break-even analysis compares fixed and variable costs to evaluate different site options.
• 📊 The three steps of locational break-even analysis are determining costs, plotting them, and selecting the optimal location.
• 💰 John Kros from Carolina Ignitions Manufacturing is considering three potential locations for a new plant: Akron, Bowling Green, and Chicago.
• 📈 Expected production volume for the analysis is 2,000 units annually across the three locations.
• 📉 Fixed costs differ by location: $30,000 for Akron, $60,000 for Bowling Green, and $110,000 for Chicago.
• 📦 Variable costs are $75/unit in Akron, $45/unit in Bowling Green, and $25/unit in Chicago.
• 📉 The total cost calculations show that Bowling Green offers the lowest cost for the expected production volume at $150,000.
• 💵 The expected profit for Bowling Green is $90,000 per year after calculating total revenue and total cost.

Q & A

What is the definition of plant location?

Plant location refers to the choice of region and selection of a specific site for establishing a business or factory.

What constitutes an ideal plant location?

An ideal location minimizes product costs, maximizes market share, reduces risk, and provides maximum social gain.

What is locational break-even analysis?

Locational break-even analysis is a cost-volume analysis that compares the economic viability of different location alternatives by assessing fixed and variable costs.

What are the three steps involved in locational break-even analysis?

1. Determine the fixed and variable costs for each location. 2. Plot the costs against annual volume. 3. Select the location with the lowest total cost for the expected production volume.

What fixed costs did John Kros identify for the three locations?

The fixed costs identified were $30,000 for Akron, $60,000 for Bowling Green, and $110,000 for Chicago.

What are the variable costs per unit for each location?

The variable costs per unit are $75 for Akron, $45 for Bowling Green, and $25 for Chicago.

How is total cost calculated in the analysis?

Total cost (TC) is calculated using the formula TC = FC + VC(Q), where FC is fixed cost, VC is variable cost per unit, and Q is the quantity produced.

What is the expected selling price of each ignition system produced?

The expected selling price of each ignition system is $120.

Which location provided the lowest total cost for production?

Bowling Green provided the lowest total cost for an expected volume of 2,000 units, totaling $150,000.

What is the expected profit for the selected location?

The expected profit for the Bowling Green location is $90,000 per year, calculated as total revenue minus total cost.