11 Location

For Operations Management, 9e by

PowerPoint Slides
Krajewski/Ritzman/Malhotra
by Jeff Heyl © 2010 Pearson Education
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Location Decisions

 Location decisions affect processes and

departments
 Marketing
 Human resources
 Accounting and finance
 Operations
 International operations

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Location Decisions

 Many factors
 Sensitive to location
 High impact on the company’s ability to meet its goals

 Dominant factors in manufacturing

 Favorable labor climate
 Proximity to markets
 Quality of life
 Proximity to suppliers and resources
 Proximity to the parent company’s facilities
 Utilities, taxes, and real estate costs
 Other factors

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Location Decisions

 Dominant factors in services

 Impact of location on sales and customer
satisfaction
 Proximity to customers
 Transportation costs and proximity to markets
 Location of competitors
 Site-specific factors

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Geographic Information Systems

 GIS is a system of computer software, hardware,

and data
 Use to manipulate, analyze, and present
information relevant to a location decision
 Create a visual representation of a firm’s location
choices
 Useful decision-making tool
 Using GIS to identify locations and demographic
customer segments
 Identifying locations that relate to target market
 Part of an array of decision-making tools

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Locating a Single Facility

 Expand onsite, build another facility, or

relocate to another site
 Onsite expansion
 Building a new plant or moving to a new retail
or office space
 Comparing several sites

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Selecting a New Facility

Step 1: Identify the important location factors and

categorize them as dominant or secondary
Step 2: Consider alternative regions; then narrow to
alternative communities and finally specific
sites
Step 3: Collect data on the alternatives
Step 4: Analyze the data collected, beginning with the
quantitative factors. (factors that can be measured in dollars,
such as annual transportation costs or taxes).

Step 5: Bring the qualitative factors pertaining to each

site into the evaluation. (A qualitative factor is one that cannot
be evaluated in dollar terms, such as community attitudes, environmental
factors, or quality of life.)

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Evaluating Location Alternatives

 Weighted Score Method

 Load Distance Method
 Center of Gravity Method
 Break Even Location Selection Method

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Calculating Weighted Scores
EXAMPLE 11.1
A new medical facility, Health-Watch, is to be located in Erie,
Pennsylvania. The following table shows the location factors,
weights, and scores (1 = poor, 5 = excellent) for one potential
site. The weights in this case add up to 100 percent. A weighted
score (WS) will be calculated for each site. What is the WS for
this site?

Location Factor Weight Score

Total patient miles per month 25 4
Facility utilization 20 3
Average time per emergency trip 20 3
Expressway accessibility 15 4
Land and construction costs 10 1
Employee preferences 10 5

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Calculating Weighted Scores
SOLUTION Location Factor Weight Score
Total patient miles per month 25 4
The WS for this particular
Facility utilization 20 3
site is calculated by
Average time per emergency trip 20 3
multiplying each factor’s Expressway accessibility 15 4
weight by its score and Land and construction costs 10 1
adding the results: Employee preferences 10 5

WS = (25  4) + (20  3) + (20  3) + (15  4) + (10  1) + (10  5)

= 100 + 60 + 60 + 60 + 10 + 50
= 340

The total WS of 340 can be compared with the total weighted

scores for other sites being evaluated.

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Application 11.1
Management is considering three potential locations for a new
cookie factory. They have assigned scores shown below to the
relevant factors on a 0 to 10 basis (10 is best). Using the
preference matrix, which location would be preferred?

Location The Sesame Ronald’s

Weight
Factor Neighborhood Street Playhouse

Material Supply 0.1 5 9 8

Quality of Life 0.2 9 8 4

Mild Climate 0.3 10 6 8

Labor Skills 0.4 3 4 7

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Application 11.1
Management is considering three potential locations for a new
cookie factory. They have assigned scores shown below to the
relevant factors on a 0 to 10 basis (10 is best). Using the
preference matrix, which location would be preferred?

Location The Sesame Ronald’s

Weight
Factor Neighborhood Street Playhouse

Material Supply 0.1 5 0.5 9 0.9 8 0.8

Quality of Life 0.2 9 1.8 8 1.6 4 0.8

Mild Climate 0.3 10 3.0 6 1.8 8 2.4

Labor Skills 0.4 3 1.2 4 1.6 7 2.8

6.5 5.9 6.8

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Load-Distance (ld) Method
Load–distance method
A mathematical model used to evaluate locations based
on proximity factors.

 Identify and compare candidate locations

 Like weighted-distance method
 Select a location that minimizes the sum of
the loads multiplied by the distance the load
travels
 Time may be used instead of distance

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 a load may be shipments from suppliers, shipments between plants or
to customers, or it may be customers or employees traveling to and
from the facility.

Euclidean distance(Noun)
The distance between two points defined as the square root of the sum of the
squares of the differences between the corresponding coordinates of the points; for
example, in two-dimensional Euclidean geometry, the Euclidean distance between
two points a = (a, a) and b = (b, b) is defined as:

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Load-Distance (ld) Method

 Calculating a load-distance score

 Varies by industry
 Use the actual distance to calculate ld score
 Use rectangular or Euclidean distances
 Different measures for distance
 Find one acceptable facility location that
minimizes the ld score
 Formula for the ld score

ld =  lidi
i

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Application 11.2

What is the distance between (20, 10) and (80, 60)?

SOLUTION
Euclidean distance:

dAB = (xA – xB)2 + (yA – yB)2 = (20 – 80)2 + (10 – 60)2 = 78.1

Rectilinear distance:

dAB = |xA – xB| + |yA – yB| = |20 – 80| + |10 – 60| = 110

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Application 12.3
Management is investigating which location would be best to
position its new plant relative to two suppliers (located in
Cleveland and Toledo) and three market areas (represented by
Cincinnati, Dayton, and Lima). Management has limited the
search for this plant to those five locations. The following
information has been collected. Which is best, assuming
rectilinear distance?

Location x,y coordinates Trips/year

Cincinnati (11,6) 15
Dayton (6,10) 20
Cleveland (14,12) 30
Toledo (9,12) 25
Lima (13,8) 40

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Application 12.3
Location x,y coordinates Trips/year
SOLUTION
Cincinnati (11,6) 15
Calculations: Dayton (6,10) 20
Cleveland (14,12) 30
Toledo (9,12) 25
Lima (13,8) 40

Cincinnati = 15(0) + 20(9) + 30(9) + 25(8) + 40(4) = 810

Dayton = 15(9) + 20(0) + 30(10) + 25(5) + 40(9) = 920
Cleveland = 15(9) + 20(10) + 30(0) + 25(5) + 40(5) = 660
Toledo = 15(8) + 20(5) + 30(0) + 25(0) + 40(8) = 690
Lima = 15(4) + 20(9) + 30(5) + 25(8) + 40(0) = 590

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Center of Gravity Method

 A good starting point

 Find x coordinate, x*, by multiplying each
point’s x coordinate by its load (lt), summing
these products li xi, and dividing by li
 The center of gravity’s y coordinate y* found
the same way
 Generally not the optimal location

i li xi i li yi
x* = y* =
i li i li

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Finding the Center of Gravity
EXAMPLE 11.2
A supplier to the electric utility industry produces power
generators; the transportation costs are high. One market area
includes the lower part of the Great Lakes region and the upper
portion of the southeastern region. More than 600,000 tons are
to be shipped to eight major customer locations as shown
below:
Customer Location Tons Shipped x, y Coordinates
Three Rivers, MI 5,000 (7, 13)
Fort Wayne, IN 92,000 (8, 12)
Columbus, OH 70,000 (11, 10)
Ashland, KY 35,000 (11, 7)
Kingsport, TN 9,000 (12, 4)
Akron, OH 227,000 (13, 11)
Wheeling, WV 16,000 (14, 10)
Roanoke, VA 153,000 (15, 5)

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Finding the Center of Gravity
What is the center of gravity Customer Location
Three Rivers, MI
Tons Shipped
5,000
x, y Coordinates
(7, 13)
for the electric utilities Fort Wayne, IN 92,000 (8, 12)
supplier? Using rectilinear Columbus, OH 70,000 (11, 10)
distance, what is the resulting Ashland, KY 35,000 (11, 7)

load–distance score for this Kingsport, TN 9,000 (12, 4)

location? Akron, OH 227,000 (13, 11)

Wheeling, WV 16,000 (14, 10)
Roanoke, VA 153,000 (15, 5)
SOLUTION
The center of gravity is calculated as shown below:

i li = 5 + 92 + 70 + 35 + 9 + 227 + 16 + 153 = 607

i li xi = 5(7) + 92(8) + 70(11) + 35(11) + 9(12) + 227(13)
+ 16(14) + 153(15) = 7,504

i li xi 7,504
x* = = = 12.4
i li 607

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Finding the Center of Gravity
What is the center of gravity Customer Location
Three Rivers, MI
Tons Shipped
5,000
x, y Coordinates
(7, 13)
for the electric utilities Fort Wayne, IN 92,000 (8, 12)
supplier? Using rectilinear Columbus, OH 70,000 (11, 10)
distance, what is the resulting Ashland, KY 35,000 (11, 7)

load–distance score for this Kingsport, TN 9,000 (12, 4)

location? Akron, OH 227,000 (13, 11)

Wheeling, WV 16,000 (14, 10)
Roanoke, VA 153,000 (15, 5)

i li yi = 5(13) + 92(12) + 70(10) + 35(7) + 9(4) + 227(11)

+ 16(10) + 153(5) = 5,572

i li yi 5,572
y* = = = 9.2
i li 607

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Finding the Center of Gravity
What is the center of gravity Customer Location
Three Rivers, MI
Tons Shipped
5,000
x, y Coordinates
(7, 13)
for the electric utilities Fort Wayne, IN 92,000 (8, 12)
supplier? Using rectilinear Columbus, OH 70,000 (11, 10)
distance, what is the resulting Ashland, KY 35,000 (11, 7)

load–distance score for this Kingsport, TN 9,000 (12, 4)

location? Akron, OH 227,000 (13, 11)

Wheeling, WV 16,000 (14, 10)
Roanoke, VA 153,000 (15, 5)

The resulting load-distance score is

ld =  lidi = 5(5.4 + 3.8) + 92(4.4 + 2.8) + 70(1.4 + 0.8) +

i
35(1.4 + 2.2) + 90(0.4 + 5.2) + 227(0.6 + 1.8) +
16(1.6 + 0.8) + 153(2.6 + 4.2)
= 2,662.4
where
di = |xi – x*| + |yi – y*|

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Application 11.4 Class Practice

A firm wishes to find a central location for its service.

Business forecasts indicate travel from the central
location to New York City on 20 occasions per year.
Similarly, there will be 15 trips to Boston, and 30 trips to
New Orleans. The x, y-coordinates are (11.0, 8.5) for New
York, (12.0, 9.5) for Boston, and (4.0, 1.5) for New Orleans.
What is the center of gravity of the three demand points?

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Application 11.4
A firm wishes to find a central location for its service. Business
forecasts indicate travel from the central location to New York
City on 20 occasions per year. Similarly, there will be 15 trips to
Boston, and 30 trips to New Orleans. The x, y-coordinates are
(11.0, 8.5) for New York, (12.0, 9.5) for Boston, and (4.0, 1.5) for
New Orleans. What is the center of gravity of the three demand
points?

SOLUTION

i li xi [(20  11) + (15  12) + (30  4)]

x* = = = 8.0
i li (20 + 15 + 30)

i li yi [(20  8.5) + (15  9.5) + (30  1.5)]

y* = = = 5.5
i li (20 + 15 + 30)

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Solved Problem 1

An electronics manufacturer must expand by building a second

facility. The search is narrowed to four locations, all of which
are acceptable to management in terms of dominant factors.
Assessment of these sites in terms of seven location factors is
shown in Table 11.1. For example, location A has a factor score
of 5 (excellent) for labor climate; the weight for this factor (20)
is the highest of any. Calculate the weighted score for each
location. Which location should be recommended?

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Solved Problem 1

TABLE 11.1 | FACTOR INFORMATION FOR ELECTRONICS MANUFACTURER

Factor Score for Each Location

Location Factor Factor Weight A B C D

1. Labor climate 20 5 4 4 5

2. Quality of life 16 2 3 4 1

3. Transportation system 16 3 4 3 2

4. Proximity to markets 14 5 3 4 4

5. Proximity to materials 12 2 3 3 4

6. Taxes 12 2 5 5 4

7. Utilities 10 5 4 3 3

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Solved Problem 1
SOLUTION
Based on the weighted scores shown in Table 11.2, location C
is the preferred site, although location B is a close second.
TABLE 11.2 | CALCULATING WEIGHTED SCORES FOR ELECTRONICS
| MANUFACTURER
Weighted Score for each Location
Location Factor Factor Weight A B C D
1. Labor climate 20
2. Quality of life 16
3. Transportation system 16
4. Proximity to markets 14
5. Proximity to materials 12
6. Taxes 12
7. Utilities 10
10
Totals
0

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Solved Problem 1
SOLUTION
Based on the weighted scores shown in Table 11.2, location C
is the preferred site, although location B is a close second.
TABLE 11.2 | CALCULATING WEIGHTED SCORES FOR ELECTRONICS
| MANUFACTURER
Weighted Score for each Location
Location Factor Factor Weight A B C D
1. Labor climate 20 100 80 80 100
2. Quality of life 16 32 48 64 16
3. Transportation system 16
48 64 48 32
4. Proximity to markets 14
70 42 56 56
5. Proximity to materials 12
24 36 36 48
6. Taxes 12
24 60 60 48
7. Utilities 10
50 40 30 30
10
Totals
0 348 370 374 330

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Solved Problem 3
The new Health-Watch facility is targeted to serve seven
census tracts in Erie, Pennsylvania, whose latitudes and
longitudes are shown in Table 11.4. Customers will travel from
the seven census-tract centers to the new facility when they
need health care. What is the target area’s center of gravity for
the Health-Watch medical facility?
TABLE 11.4 | LOCATION DATA AND CALCULATIONS FOR HEALTH WATCH
Population  Population 
Census Tract Population Latitude Longitude
Latitude Longitude
15 2,711 42.134 –80.041 114,225.27 –216,991.15
16 4,161 42.129 –80.023 175,298.77 –332,975.70
17 2,988 42.122 –80.055 125,860.54 –239,204.34
25 2,512 42.112 –80.066 105,785.34 –201,125.79
26 4,342 42.117 –80.052 182,872.01 –347,585.78
27 6,687 42.116 –80.023 281,629.69 –535,113.80
28 6,789 42.107 –80.051 285,864.42 –543,466.24
Total 30,190 –1,271,536.04 –2,416.462.80

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Solved Problem 3
SOLUTION
We use MapPoint in this solution, with coordinates represented
in the form of latitude and longitude rather than an (x, y) grid, to
calculate the center of gravity. First the target area is displayed
on the map of Erie, Pennsylvania, using MapPoint. In Figure
11.6 a pushpin is placed in the approximate geographical
center of the census tracts. The location sensor is then turned
on. By moving the cursor over the pushpin, the location sensor
will register the longitude and latitude for the pushpin. The
population of each census tract is added to the map using
MapPoint’s built-in demographic data. Thus, we obtain the
following table in which latitudes and longitudes for each of the
seven census-tracts are given, along with their actual
populations, in thousands.

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Solved Problem 3

Figure 11.6 – Center of Gravity for Health-Watch

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Solved Problem 3
Next we solve for the center of gravity x* and y*. Because the
coordinates are given as longitude and latitude, x* is the
longitude and y* is the latitude for the center of gravity.

1,271,536.05
x* = = 42.1178
30,190

– 2,416,462.81
y* = = – 80.0418
30,190

The center of gravity is (42.12 North, 80.04 West), and is shown

on the map to be fairly central to the target area.
Active Model 11.2 in myomlab confirms these calculations for
the center of gravity, and allows us to explore other alternative
locations as well.

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 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10]
4
[2]
y (miles)

3 B G
(2.5, 2.5) D F
2 (9, 2.5)
[5] (5, 2) (7, 2) [14]
[7] [20]
1

0
1 2 3 4 5 6 7 8 9 10
x (miles) East
Example 7.2

11 – 34
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10]
4 Census Population
[2]
y (miles)

Tract (x, y) (l) lx ly

3 B A (2.5, 4.5) 2 G
(2.5, 2.5) DB (2.5, 2.5) F 5 (9, 2.5)
2
[5] C 2) (5.5, (7,
(5, 4.5)2) 10 [14]
D[7] (5, 2)
[20] 7
1
E (8, 5) 10
0 F (7, 2) 20
1 2 3 4 G5 6(9, 2.5)
7 8 14 9 10
x (miles) East
Example 7.2

11 – 35
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10]
4 Census Population
[2]
y (miles)

Tract (x, y) (l) lx ly

3 B A (2.5, 4.5) 2 G 5
(2.5, 2.5) DB (2.5, 2.5) F
2 (9, 2.5)
[5] C 2) (5.5, (7,
(5, 4.5)2) [14]
D[7] (5, 2)
[20]
1
E (8, 5)
0 F (7, 2)
1 2 3 4 G5 6(9, 2.5)
7 8 9 10
x (miles) East
Example 7.2

11 – 36
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10]
4 Census Population
[2]
y (miles)

Tract (x, y) (l) lx ly

3 B A (2.5, 4.5) 2 G 5 9
(2.5, 2.5) DB (2.5, 2.5) F
2 (9, 2.5)
[5] C 2) (5.5, (7,
(5, 4.5)2) [14]
D[7] (5, 2)
[20]
1
E (8, 5)
0 F (7, 2)
1 2 3 4 G5 6(9, 2.5)
7 8 9 10
x (miles) East
Example 7.2

11 – 37
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10]
4 Census Population
[2]
y (miles)

Tract (x, y) (l) lx ly

3 B A (2.5, 4.5) 2 G 5 9
(2.5, 2.5) DB (2.5, 2.5) F
2 (9, 2.5)
[5] C 2) (5.5, (7,
(5, 4.5)2) [14]
D[7] (5, 2)
[20]
1
E (8, 5)
0 F (7, 2)
1 2 3 4 G5 6(9, 2.5)
7 8 9 10
x (miles) East
Example 7.2

11 – 38
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10]
4 Census Population
[2]
y (miles)

Tract (x, y) (L) Lx Ly

3 B A (2.5, 4.5) 2 G 5 9
(2.5, 2.5) DB (2.5, 2.5) F 5 (9, 2.5)12.5 12.5
2
[5] C 2) (5.5, (7,
(5, 4.5)2) 10 [14] 55 45
D[7] (5, 2)
[20] 7 35 14
1
E (8, 5) 10 80 50
0 F (7, 2) 20 140 40
1 2 3 4 G5 6(9, 2.5)
7 8 14 9 126 10 35
x (miles) East
Example 7.2

11 – 39
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10]
4 Census Population
[2]
y (miles)

Tract (x, y) (L) Lx Ly

3 B A (2.5, 4.5) 2 G 5 9
(2.5, 2.5) DB (2.5, 2.5)F 5 (9, 2.5)12.5 12.5
2
[5] C 2) (5.5, (7,
(5, 4.5)2) 10 [14] 55 45
D[7] (5, 2)
[20] 7 35 14
1
E (8, 5) 10 80 50
0 F (7, 2) 20 140 40
1 2 3 4 G5 6(9, 2.5)
7 8 14 9 126 10 35
x (miles) Totals 68 East
453.5 205.5
Example 7.2

11 – 40
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E x* = Lx
5 C ____
A (8, 5)
4 (2.5, 4.5) [10] L
[2] Census Population
y (miles)

Tract (x, y) (l) lx ly

3 B A (2.5, 4.5) 2 G
y* = Ly 5 9
(2.5, 2.5) DB (2.5, 2.5)F ___
5 (9, 2.5)12.5 12.5
2
[5] C 2) (5.5, (7,
(5, 4.5)2) 10 [14] L 55 45
D[7] (5, 2)
[20] 7 35 14
1
E (8, 5) 10 80 50
0 F (7, 2) 20 140 40
1 2 3 4 G5 6(9, 2.5)
7 8 14 9 126 10 35
x (miles) Totals 68 East
453.5 205.5
Example 7.2

11 – 41
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10] x* = 453.5
4 Census Population 68
[2]
y (miles)

Tract (x, y) (l) lx ly

3 B A (2.5, 4.5) 2 G 5 9
205.5
(2.5, 2.5) DB (2.5, 2.5)F 5 (9, = 12.5
y*2.5) 12.5
2
[5] C 2) (5.5, (7,
4.5)2) 10 [14] 55
6845
(5,
D[7] (5, 2)
[20] 7 35 14
1
E (8, 5) 10 80 50
0 F (7, 2) 20 140 40
1 2 3 4 G5 6(9, 2.5)
7 8 14 9 126 10 35
x (miles) Totals 68 East
453.5 205.5
Example 7.2

11 – 42
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10] x* = 453.5
4 Census Population 68
[2]
y (miles)

Tract (x, y) (l) lx ly

3 B A (2.5, 4.5) 2 G 5 9
205.5
(2.5, 2.5) DB (2.5, 2.5)F 5 (9, = 12.5
y*2.5) 12.5
2
[5] C 2) (5.5, (7,
4.5)2) 10 [14] 55
6845
(5,
D[7] (5, 2)
[20] 7 35 14
1
E (8, 5) 10 80 50
0 F (7, 2) 20 140 40
1 2 3 4 G5 6(9, 2.5)
7 8 14 9 126 10 35
x (miles) Totals 68 East
453.5 205.5
Example 7.2

11 – 43
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10] x* = 6.67
4 Census Population
[2]
y (miles)

Tract (x, y) (l) lx ly

3 B A (2.5, 4.5) 2 G 5 9
(2.5, 2.5) DB (2.5, 2.5)F 5 (9, = 12.5
y*2.5) 3.02 12.5
2
[5] C 2) (5.5, (7,
(5, 4.5)2) 10 [14] 55 45
D[7] (5, 2)
[20] 7 35 14
1
E (8, 5) 10 80 50
0 F (7, 2) 20 140 40
1 2 3 4 G5 6(9, 2.5)
7 8 14 9 126 10 35
x (miles) Totals 68 East 205.5
453.5
Example 7.2

11 – 44
 Center of Gravity Approach Location
North
Health-Watch
6
(5.5, 4.5)
[10] E
5 C
A (8, 5)
(2.5, 4.5) [10] x* = 6.67
4
[2]
y (miles)

3 B G
(2.5, 2.5) D F
(9, =
y*2.5) 3.02
2
[5] (5, 2) (7, 2) [14]
[7] [20]
1

0
1 2 3 4 5 6 7 8 9 10
x (miles) East
Example 7.2

11 – 45
Using Break-Even Analysis

 Compare location alternatives on the basis

of quantitative factors expressed in total
costs
 Determine the variable costs and fixed costs for
each site
 Plot total cost lines
 Identify the approximate ranges for which each
location has lowest cost
 Solve algebraically for break-even points over
the relevant ranges

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 11 – 46

Break-Even Analysis for Location
EXAMPLE 11.3
An operations manager narrowed the search for a new facility
location to four communities. The annual fixed costs (land,
property taxes, insurance, equipment, and buildings) and the
variable costs (labor, materials, transportation, and variable
overhead) are as follows:

Community Fixed Costs per Year Variable Costs per Unit

A $150,000 $62
B $300,000 $38
C $500,000 $24
D $600,000 $30

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Break-Even Analysis for Location

Step 1: Plot the total cost curves for all the communities
on a single graph. Identify on the graph the
approximate range over which each community
provides the lowest cost.
Step 2: Using break-even analysis, calculate the break-
even quantities over the relevant ranges. If the
expected demand is 15,000 units per year, what is
the best location?

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Break-Even Analysis for Location
SOLUTION
To plot a community’s total cost line, let us first compute the
total cost for two output levels: Q = 0 and Q = 20,000 units per
year. For the Q = 0 level, the total cost is simply the fixed costs.
For the Q = 20,000 level, the total cost (fixed plus variable
costs) is as follows:

Variable Costs Total Cost

Community Fixed Costs (Cost per Unit)(No. of Units) (Fixed + Variable)

A $150,000
B $300,000
C $500,000
D $600,000

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Break-Even Analysis for Location
SOLUTION
To plot a community’s total cost line, let us first compute the
total cost for two output levels: Q = 0 and Q = 20,000 units per
year. For the Q = 0 level, the total cost is simply the fixed costs.
For the Q = 20,000 level, the total cost (fixed plus variable
costs) is as follows:

Variable Costs Total Cost

Community Fixed Costs (Cost per Unit)(No. of Units) (Fixed + Variable)

A $150,000 $62(20,000) = $1,240,000 $1,390,000

B $300,000 $38(20,000) = $760,000 $1,060,000
C $500,000 $24(20,000) = $480,000 $980,000
D $600,000 $30(20,000) = $600,000 $1,200,000

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Break-Even Analysis for Location
Figure 11.1 shows the
graph of the total cost 1,600 –
A
lines. (20, 1,390)

Annual cost (thousands of dollars)

The line for community 1,400 –
(20, 1,200) D
A goes from (0, 150) to 1,200 – (20, 1,060)
B
(20, 1,390). The graph C
indicates that 1,000 –
(20, 980)
community A is best for 800 –
low volumes, B for Break-even
point
intermediate volumes, 600 –

and C for high volumes. 400 – Break-even

point
We should no longer
200 –
consider community D, A best B best C best

because both its fixed |

–
| | | | | | | | | | |

0 2 4 6 8 10 12 14 16 18 20 22
and its variable costs
6.25 14.3
are higher than Q (thousands of units)
community C’s.
Figure 11.1 – Break-Even Analysis of Four
Candidate Locations

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Break-Even Analysis for Location
Step 2: The break-even quantity between A and B lies at the
end of the first range, where A is best, and the
beginning of the second range, where B is best. We
find it by setting both communities’ total cost
equations equal to each other and solving:
(A) (B)
$150,000 + $62Q = $300,000 + $38Q
Q = 6,250 units

The break-even quantity between B and C lies at the end of the

range over which B is best and the beginning of the final range
where C is best. It is
(B) (C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units

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Break-Even Analysis for Location
No other break-even quantities
are needed. The break-even
Step 2: The break-even quantity point between
between A and
A and C lies
B lies at the
above the shaded area,
end of the first range, where A is best, and the which
beginning of the second does not mark
range, whereeither the start
B is best. We
or the end of one of the
find it by setting both communities’ total cost three
equations equal to each relevant ranges.
other and solving:
(A) (B)
$150,000 + $62Q = $300,000 + $38Q
Q = 6,250 units

The break-even quantity between B and C lies at the end of the

range over which B is best and the beginning of the final range
where C is best. It is
(B) (C)
$300,000 + $38Q = $500,000 + $24Q
Q = 14,286 units

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Solved Problem 2

The operations manager for Mile-High Lemonade narrowed the

search for a new facility location to seven communities. Annual
fixed costs (land, property taxes, insurance, equipment, and
buildings) and variable costs (labor, materials, transportation,
and variable overhead) are shown in Table 11.3.
a. Which of the communities can be eliminated from further
consideration because they are dominated (both variable
and fixed costs are higher) by another community?
b. Plot the total cost curves for all remaining communities on a
single graph. Identify on the graph the approximate range
over which each community provides the lowest cost.
c. Using break-even analysis, calculate the break-even
quantities to determine the range over which each
community provides the lowest cost.

Copyright © 2010 Pearson Education, Inc. Publishing as Prentice Hall. 11 – 54

Solved Problem 2

TABLE 11.3 | FIXED AND VARIABLE COSTS FOR MILE-HIGH LEMONADE

Community Fixed Costs per Year Variable Costs per Barrel

Aurora $1,600,000 $17.00

Boulder $2,000,000 $12.00

Colorado Springs $1,500,000 $16.00

Denver $3,000,000 $10.00

Englewood $1,800,000 $15.00

Fort Collins $1,200,000 $15.00

Golden $1,700,000 $14.00

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Solved Problem 2
Location costs (in millions of dollars)

10 –

8–
Break-even
Golden
6– point

4– Break-even
point

2–
Fort Collins Boulder Denver
| | | | | | |
–
0 1 2 3 4 5 6
2.67

Barrels of lemonade per year (in hundred thousands)

Figure 11.5 – Break-Even Analysis of Four Candidate Locations

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Solved Problem 2
SOLUTION
a. Aurora and Colorado Springs are dominated by Fort Collins,
because both fixed and variable costs are higher for those
communities than for Fort Collins. Englewood is dominated
by Golden.
b. Figure 11.5 shows that Fort Collins is best for low volumes,
Boulder for intermediate volumes, and Denver for high
volumes. Although Golden is not dominated by any
community, it is the second or third choice over the entire
range. Golden does not become the lowest-cost choice at
any volume.

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Solved Problem 2
c. The break-even point between Fort Collins and Boulder is

$1,200,000 + $15Q =$2,000,000 + $12Q

Q =266,667 barrels per year

The break-even point between Denver and Boulder is

$3,000,000 + $10Q =$2,000,000 + $12Q

Q =500,000 barrels per year

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Assignment Question 1
 West Gorham High School is to be located at the population
center of gravity of three communities: Westbrook,
population 16,000; Scarborough, population 22,000; and
Gorham, population 36,500. Westbrook is located at
43.6769˚N, 70.3717˚W; Scarborough is located at 43.5781˚N,
70.3222˚W; and Gorham is located at 43.6795˚N, 70.4447˚W.
 a. Where should West Gorham High School be located?
 b. If only two pieces of adequate land are available for sale:
Baker’s Field at 43.6784˚N, 70.3827˚W; or L onesome Acres
at 43.5119˚N, 70.3856˚W, using rectilinear distances, which is
closer to the site located in part (a)?

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Question no 2
 Wiebe Trucking, Inc., is planning a new warehouse to serve the
western United States. Denver, Santa Fe, and Salt Lake City are
under consideration. For each location, annual fixed costs (rent,
equipment, and insurance) and average variable costs per shipment
(labor, transportation, and utilities) are listed in the following table.
Sales projections range from 550,000 to 600,000 shipments per year.

 a. Plot the total cost curves for all the locations on a single graph.
 b. Which city provides the lowest overall costs?

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Question 3
 A larger and more modern main post office is to be constructed at a new
location in Davis, California. Growing suburbs caused a shift in the
population density from where it was 40 years ago, when the current facility
was built. Annette Werk, the postmaster, asked her assistants to draw a grid
map of the seven points where mail is picked up and delivered in bulk. The
coordinates and trips per day to and from the seven mail source points and
the current main post office, M, are shown in the following table. M will
continue to act as a mail source point after relocation.

a. Calculate the center of gravity as a possible location for the new facility
(round to the nearest whole number).
b. Compare the load–distance scores for the location in part (a) and the
current location, using rectilinear distance.
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 Oscar’s Bowling, Inc., wants to break into the Phoenix
metropolitan market with one of its super-sized 200 lane, 24-
hour bowling alleys. It, however, only has enough capital to
build one facility. Oscar wants it to be centered by
population, as determined by the center of gravity method.
The following information is given:

a. Where should Oscar build?

b. If Oscar wanted to relocate to the closest city near his new
facility—where would he live?

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