Plant

A plant is nothing but a

manufacturing unit where the
production t a ke place . So
production is nothing but is
creation of utility or value added
p ro c e s s .
I n o t h e r w o r d s i t m a y b e d e fi n e d a s
a production system w h e re a set
of input re s o u rc e s i s c o n v e r t e d
A p l a n t i s a p l a c e w h e r e m e n , m/c,
m a t e r i a l a n d m o n e y a re b ro u g h t
together for manufacturing
p ro d u c t s .
Plant Location
I t deals w i t h the process of site
selection.

I t i s ve r y i m p o r t a n t s t e p factor
o fl a n n i n g
p in vo l v e s y
which re g i o n s e le c t i n g a
T h e m o s t d i ffi c u l t p a r t o f t h e
plant location analyze is to
determine the criteria by which
the various plant location
a l t e rn a t i v e ( s it e s ) can be
T
ehvea l u
p ro
a tbel edma nodf cpol amn tp al o
rec adt .i o n h a s b e e n
d e fi n e d completely by ‘HOLMES’ as
determining the location which in
consideration of all the factors a ff e c t i n g
d e l i v e re d t o c u s t o m e r , c o s t o f p r o d u c t t o
b e m a n u f a c t u r e d w i l l a ff o rd t h a t e n t e r p r i s e ,
the greatest advantages t o be obtained by
virtue of location. The location is one where
the prices and volume of sales w i l l bring
m a x i m u m p ro fi t t o t h e o rg a n i z a t i o n s .
Fa c t o r s w h i c h i n fl u e n c e t h e s e l e c t i o n o f
Location
1. P rox i m i t y t o C u s t o m e r s ( M a r ke t s )
When the plant is located near the
c u s t o m e r s / m a r ke t s , t h e c o s t o f t r a n s p o r t a t i o n i s low.
T h i s re d u c e s t h e p r o d u c t c o s t . M o s t s m a l l a n c i l l a r y
u n i t s a re l o c a t e d n e a r b i g a u t o m o t i v e f a c t o r i e s . T h e
OEMs (Original E q u i p m e n t M a n u f a c t u re r s ) a re the
institutional customers of small parts, components, or
sub- a s s e m b l i e s f r o m t h e s e a n c i l l a r y u n i t s . T h e
Maruti Joint Ve n t u re C o m p l ex a t G u rg a o n n e a r t h e
Maruti Suzuki car f ac tor y is a good example of h o w
p r ox i m i t y t o t h e c u s t o m e r re d u c e s t h e t r a n s p o r t a t i o n
cost of auto ancillary units, w h i c h supply parts,
c o m p o n e n t s , s u b - a s s e m b l ie s , e t c . f o r making the
M a r u t i car. P rox i m i t y t o m a r ke t s a l s o a l l o w s
companies to m e e t sudden spurt in demand, thus
p ro v i d i n g a n a d v a n t a g e over c o m p e t i t o r s w h o a re
l o c a t e d a t far- off p l a c e s . T h a t i s w h y w e fi n d
h o s p i t a l s , s c h o o l s , p o s t o ffi c e s , banks, insurance
c o m p a n i e s , e t c . l o c a t e d i n h i g h p o p u l a t i o n z on e s s o
 2 . Prox i m i t y t o R a w
Ma t e r iaare
Why ls the integrated s t e e l p l a n t s o f S AIL
l o c a t e d i n Bihar, We st B e n g a l a n d Orissa? T h i s i s
because of the l a rg e p re s e n c e o f i ro n ore, c o a l ,
dolomite and limestone m i n e s i n t h e s e re g i o n s ,
w h i c h a re t h e b a s i c r a w m a t e r i a l s fo r s t e e l
m a k i n g . Prox i m i t y t o t h e s o u rc e o f r a w m a t e r i a l s
i s a n i m p o r t a n t c o n s i d e r a t i o n fo r f a c i l i t y l o c a t i o n ,
e s p e c i a l l y i f t h e r a w m a t e r i a l s a re bulky, a n d h u g e
s h i p p i n g c o s t s w i l l b e i n c u r re d i n t r a n s p o r t i n g
t h e m . W h e re i t b e c o m e s a b s o l u t e l y n e c e s s a r y t o
transport them, i t is found that c o s t of the
material is equal to the shipping c ost thus making
the r a w materials very costly at the point where
t h e y a re used.
3. Good Tr a n s p o r t a t i o n Fa c i l i t i e s
Good t r a n s p o r t a t i o n f a c i l i t i e s a re n e c e s s a r y fo r
m o v e m e n t o f g o o d s a n d pe o pl e . Re gi ons n e a r
m e t r o c i t i e s have t h e s e f a c i l i t i e s , a s t h e y have a
4. Av a i l a b i l i t y o f Po w e r
Uninterrupted power supply is a basic
re q u i re m e n t o f m ost industries. Companies
have t o s e t u p t h e i r o w n DG s e t s o r have
c a p t i v e p o w e r p l a n t s i f t h e y a re located in
a re a s w i t h p o w e r p ro b l e m s . T h i s i n c re a s e s t h e
cost of the p ro d u c t , besides additional
p ro b l e m s o f r u n n i n g t h e DG s e t s , c a p t i v e p o w e r
plants, etc.
5. B a s i c A m e n i t i e s
T h e l o c a t i o n s i t e s h o u l d h a ve c e r t a i n b a s i c
facilities l i ke s e w a g e s y s t e m , p i p e d w a t e r
supply, s e c u r i t y , e t c . , t h a t a re m a n a g e d b y t h e
l o c a l m u n i c i p a l i t y. Roads u p t o t h e f a c t o r y
p re m i s e s a re a l w a y s d e s i r a b l e . I f t h e s e b a s i c
a m e n i t i e s a re p rovi d ed , i t w i l l be easier for
the employees and they will be willing to w o r k
in that f a c t o r y. Av a i l a b i l i t y of housing
6 . G o v e rn m e n t
Po l axe
Re i c i eds t a x a t i o n p o l i c i e s , ex c i s e d u t y e xe m p t i o n
and v a r i o u s o t h e r p ro m o t i o n a l e ff o r t s / s c h e m e s
attract industrial activities in a re g i o n .
Po n d i c h e rr y a n d D a m a n a n d Diu a re d e c l a re d ‘no
s a l e s t a x re g i o n s ’ a n d w e fi n d that many
c o m p a n i e s have t h e i r o ffi c e s / w a re h o u s e s l o c a t e d
t h e re . M a n y s t a t e g o v e r n m e n t s p r o m o t e i n d u s t r i a l
a c t i v i t i e s i n t h e i r re g i o n s b y c re a t i n g I n d u s t r y
D e v e l o p m e n t Zones, S p e c i a l E c o n o m i c Zones, e t c .
T h e g o v e r n m e n t s o f K a r n a t a k a , A n d h r a Pradesh,
Ta m i l N a d u a n d UP have c r e a t e d s o f t w a r e
d e v e l o p m e n t p a r k s , w h e r e f a c i l i t i e s s u c h a s high-
speed I n t e r n e t , s e r v e r s , e t c . a re p ro v i d e d t o
software companies at subsidized rates.
A g r i c u l t u re g e t s m a x i m u m s u b s i d i e s f r o m t h e
central as w e l l a s m a n y s t a t e g o v e rn m e n t s .
Vari o u s p ro c e s s i n g plants of agricultural and
horticultural products located in these states can
7. Env i r o n m e n ta l Community
and Considerations:-
Many state h ave
e
gnovev i ro
r nnm
meennttsa l p o l i c i e s , w h i c h have s t r itcot
be followed by the industries
o p e r a t i n g t h e re . States such as
Uttaranchal do not give permission t o
such industries which re l e a s e t o x i c
e ffl u e n t s . Opposition from the
c o m m u n i t y re g a rd i n g t h e c o n s t r u c t i o n
o f a p l a n t i n t h e i r re g i o n c a n d i s r u p t
t h e w h o l e p ro j e c t .
Af t e r the Union Carbi de factory
d i s a s t e r i n B h o p a l s o m e d e c a d e s ago,
every new factory faces close
8. Prox i m i t y t o S u b c o n t r a c t o r s : -
Small ancillary units manufacturing small
c o m p o n e n t s / s u b - a s s e m b l i e s a re i m p o r t a n t for
any n e w f a c t o r y. A n c i l l a r y u n i t s a n d j o i n t
v e n t u re s s e t u p t h e i r f a c i l i t i e s n e a r t h e OEM.
The advantage to the ancillaries is that it
w i l l re d u c e t h e i r c o m p o n e n t c o s t . T h e OEMs
t o o b e n e fi t i f t h e y s e t up their facilities
n e a r t h e s e a n c i l l a r i e s . M a r u t i S u z u ki s e t u p
i t s s e c o n d f a c i l i t y a t M a n e s a r n e a r G u rg a o n
( w h e r e t h e i r fi r s t f a c i l i t y i s l o c a t e d ) s o t h a t
i t c o u l d t a ke a d v a n t a g e o f t h e s u p p l i e r s
p re s e n t a t t h e M a r u t i J o i n t Ve n t u re C o m p l ex
a t Gurga on.
9. Av a i l a b i l i t y o f C h ea p Land:-
Land is the basic necessity for the
construction of a n e w plant. Many big
companies set up their facilities in
10. L o w C o n s t r u c t i o n Costs:-
Construction costs of a plant may be
low at a particular place due to
cheap labour a v a i l a b l e t h e re . T h e
construction material may also be
cheaper at another place. Such places
a re p re f e rre d f o r l o c a t i n g a p l a n t .
11.Av a i l a b i l i t y o f Cheap, S k i l l e d a n d
E ffi c i e n t Labour:-
Many companies locate their facilities
at p l a c e s w h e r e t h e re i s c h e a p ,
s kffi
e i lc
l ei e
dn a t nla
d b o u r. M a n y ar
c o m p a n ies l o cb a ra
t i nngch e s ti n heir e
b e c a u s e t h e Sout p e o phl e h e re Indi
a re d i s c i p l i n e d , e ffi c i e n t a n d a
12. Fuel:-
Fuel a s a l o c a t i o n a l f a c t o r v a r i e s f r o m
i n d u s t r y t o i n d u s t r y. I n d u s t r i e s u s i n g
fuel as a basic r a w material and
substitution of other fuel may be
d i ffi c u l t o r i m p o s s i b l e . So a v a i l a b i l i t y
o f f u e l i n re q u i re d q u a n t i t y i s a l s o a n
i m p o r t a n t f a c t o r t o b e ke p t i n v i e w.
13. Wa ter :-
Pro c e s s i n d u s t r i e s re q u i re h u g e q t y o f
w a t e r. No p ro c e s s could operate
without water as a cooling medium,
medium for waste disposal.
Pro d u c t i o n o f a t o n o f A L re q u i re s 3.2
lacs gallons, for steel 65000 gallons,
14. C l i m a t e :-
The needs a particul
p ro c e ss e n v i ro n m e n t a r a n d
atmospheric t h e p ro c e s s itsh e
e ffi
a ff ecci teendc yb yo ft h egsree at
c ol y
n d i t i o n s . e.g Pa s t
Wheather, e a r t h - q u a ke s , fl o o d d a t a
may consider for locating a plant.
15. Av a i l a b i l i t y o f fi n a n a n c i a l f a c i l i t y: -
T h e v o l o u m e o f saving, t h e p ro p o r t i o n
of i t w h i c h is available for industrial
investment a n d t h e p re s e n c e o f
banking facilities, insurance
c o m p a n i e s e t c a t t r a c t a l a rg e n u m b e r
of industries at the place where such
f a c i l i t i e s a re a v a i l a b l e easily.
16.E x i s t e n c e o f s i m i l a r Industries: -
N e w c o m e r s c a n s t a r t t h e p l a n t at
p l a c e s w h e re t h e r e has already
been e s t a b l ished a l a rg e
number of similar industries.
17. Pre f e re n t i a l f a c t o r: -
In this case the location decision is
d o m i n a t e d b y a p e r s o n a l f a c t o r. I t
depends u p o n i n d i v i d u a l p re f e re n c e
i.e. i f a p e r s o n from a particular
s t a t e , h e m a y l i ke t o l o c a t e h i s u n i t
i n t h a t s t a t e only.
M e t h o d o f Tr e at m e n t (MOT )
fo r Plant Lo c a t i o n : -
T h e t y p i c a l ‘ M e t h o d o f Tre a t i n g ’ a
p l a n t l o c a t i o n p ro b l e m c a n b e
divided into three main steps
w h i c h a re a s f oll ows : -
I. S e l e c t i n g t h e G e n e ra l
t e r r i t o r y (Region/Zone)
II. S e l e c t i n g the
particular Community
III. S e l e c t i n g t h e e x a c t P l a n t
Site
I.G e n e r a l t e r r i t o r y S e l e c t i o n
(Region/Zone) T h e l o c a t i o n f a c t o r
g ove r n i n g the selection of General
Te r r i t o r y a s fo l l o w s: -
1.Av a i la b i li t y o f l a n d & c o n s tr u c ti o n
at e c o n o m i c a l c o s t
2. Av a i l a b i l i t y o f r a w m a t e r i a l
3. Av a i l a b i l i t y o f t r a n s p o r t f a c i l i t y
4.Av a i l a b i l i t y o f l a b o u r ( s k i l l e d ,
semiskilled, unskilled)
5. Av a i l a b i l i t y o f s u b s i d y
6. Av a i l a b i l i t y o f po wer, w a t e r , f u e l
supply
7. Av a i l a b i l i t y o f t a x a t i o n a n d l a w s
8. E n v i ro n m e n t f a c t o r
9.Re l a t e d / A n c i l l a r y i n d u s t r i e s
II. S e l e c t i o n o f Pa r t i c u l a r C o m m u n i t y
The location fa cto r g ove r n i n g
the s e l e c t i o n o f Pa r t i c u l a r
C o m m u n i t y a s fo l l o w s: -
1. Size o f C o m m u n i t y
2.C o m m u n i t y at t i t u d e to w a r d s
new facility location
3. Av a i l a b i l i t y o f r a w m a t e r i a l
4. Av a i l a b i l i t y o f t r a n s p o r t f a c i l i t y
5.Av a i l a b i l i t y o f l a b o u r ( s k i l l e d ,
semiskilled, unskilled)
6. Av a i l a b i l i t y o f s u b s i d y
7. Av a i l a b i l i t y o f po wer, w a t e r , f u e l
supply
8. Av a i l a b i l i t y o f t a x a t i o n a n d l a w s
9.E n v i ro n m e n t f a c t o r
III. S e l e c t i o n o f E x a c t L o c a t i o n
The actua l location of the plant will
b e g o v e rn e d b y t h e f o l l o w i n g f a c t o r s : -
1. C o s t o f t h e P l a n t s i t e a n d size o f t h e
site
2. C o n s t r u c t i o n c o s t
3. Av a i l a b i l i t y o f r a w m a t e r i a l
4. Av a i l a b i l i t y o f t r a n s p o r t f a c i l i t y
5. Av a i l a b i l i t y o f s u b s i d y
6. Av a i l a b i l i t y o f po wer, w a t e r , f u e l
supply
7. Av a i l a b i l i t y o f t a x a t i o n a n d l a w s
8. E n v i ro n m e n t f a c t o r
9. C u s t o m e r s c o n c e n t r a t i o n s a n d t re n d s
The important r ele v a n t p o i n t s
and selecting the fo r
s i t e are:-
1. C o m m u n i t y Fa c i l i t i e s
2. C o m m u n i t y a t t i t u d e
3. Wa ter Di s p o sa l
4. Po l l u t i o n
5. S i t e size
6. Topography,soil s t r u c t u r e &
drainage
7. Tr a n s p o r t f a c i l i t i e s
8. E n v i ro n m e n t f a c t o r
9.Re l a t e d / A n c i l l a r y
i n d u s t r i e s 10.Lan d c o s t
1 1 . Le g a l a s p e c t s o f t h e
property
Rural S i t e ( C o u n t r y Site) a n d U r b a n
P l a n t S i t e (City Site)
A plant may be located either in
c o u n t r y s i d e o r i n t h e c i t y o r (Suburb)
midway between the two.
A d v a n t a g e s o f C o u n t r y s i d e site:-
L a n d i s a v a i l a b l e a t v e r y c h e a p rate,,
E x p a n s i o n c a n b e d o n e easily, B u i l d i n g
c o s t i s m i n i m u m , L o w e r r a t e o f re n t , t a x
and insurance,Labour is available at l o w
cost,No danger of pollution, Le s s
Re s t r i c t i o n , Le s s c o n fl i c t s b e t w e e n
employee and employer etc.
D i s a d v a n t a g e s o f C o u n t r y s i d e site:-
Le s s s k i l l e d labour,Far a w a y f r o m m k t &
c u s t o m e r s , Tr a n p o r t i n g cost of raw
Ad v a n t a g e s o f C i t y s i d e
S k i l l e d l a b o u r i s a v a i l a b l e i n a m p l e qty,
site:-
Better t r a i n i n g f a c i l i t i e s f o r w o r ke r s ,
Pre s e n c e o f A n c i l l a r y u n i t s , L a rg e l o c a l
m k t for the p ro d u c t , B e t t e r t r a n s p o r t
facility, Better Education other social
fwaacti e
l i rt i esupply,
s , Po w ePo r lai cned a n d fi re
fa c i l i t p fi
r ontaencct i a
o ln a n d
y, B e t t e a pcporo mamce hr c i a l d i f fe re g ov t
dfaecpi tl itts ., r ta
o d ve r t i s e m e nntt o f .
Easy
py,r o d u c t e Easy
tc. company
D i s a d v a n t a g e s o f C i t y s i d e site:-
High c o s t of land and building, High rate
of t a x and insurance, Scarcity of land
a n d d i ffi c u l t i e s f o r ex p a n s i o n .
Ad v a n t a g e s o f Suburbs
L a rg e l a n d a re a c l o s e
site:- to transport
facilities a n d l a rg e p o p u l a t i o n c e n t re ,
Fre e d o m f r o m common city building
zone a n d o t h e r restrictions normally
found in cities, Fe m a l e employee
a v a i l a b l e i n s u b u r b a n a re a , A d v a n t a g e s
o f Ta xe s , E s c a p e f r o m h i g h i l y u n i o n i z e d
a re a s , O t h e r f a c i l i t i e s a re w i t h i n re a c h
etc.
THE LOCATION DECISION PROCESS
T h e p ro c e s s o f d e c i d i n g o n t h e f a c i l i t y
location, begins by listing the various
location options. Then the advantages and
disadvantages of each location a re
i d e n t i fi e d . T h e s e a re t h e n c o m p a r e d w i t h
t h e l i s t o f f a c t o r s t h a t a re n e c e s s a r y f o r
t h a t p a r t i c u l a r i n d u s t r y – e.g., t h e e s s e n t i a l
parameters, or the factors that would be
of advantage t o th at particular industry,
e t c . T h e n e a c h l o c a t i o n o p t i o n i s s c re e n e d
u s i n g v a r i o u s m o d e l s a n d t h e l o c a t i o n s a re
rated according to these models. Based on
the outcome of this exe rc i s e , t h e m o s t
suitable location is chosen. Va r i o u s
m e t h o d s / m o d e l s a re u s e d n o w a d a y s t o
d e t e r m i n e t h e m o s t s u i t a b l e l o c a t i o n . We
Te c h n i q u e s o f Fa c t o r Rat i n g
and L o c a t i o n Ra t i n g
T h i s i s t h e s i m p l e s t m e t h o d f o r a rr i v i n g
at the best location. In this method,
t w o t y p e s o f r a t i n g s a re g i v e n –
1.E v e r y f a c t o r t h a t i s re l e v a n t t o t h e
i n d u s t r y i s g i v en a r a t i n g b e t w e e n 1
a n d 5. T h e s e f a c t o r s a re re l e v a n t t o
the industry, i r re s p e c t i v e o f t h e
l o c a t i o n . T h i s i s c a l l e d Fa c t o r Rating.
2.E v e r y f a c t o r t h a t h a s b e e n l i s t e d i n (1),
is g i v e n a re l a t i v e r a t i n g b e t w e e n 1
and 5 for each of the locations
p ro p o s e d t o b e s e l e c t e d . T h i s i s c a l l e d
L o c a t i o n Ra t i n g
 E x a m p l e 1 M/s I n d i a n a Le a t h e r s h a s i d e n t i fi e d t h r e e l o c a t i o n s , Ka npur ,
N o i d a a n d Lu c k n o w , t o s e t u p a l e a t h e r g o o d s m a n u f a c t u r i n g f a c i l i t y.
T h e f a c t o r r a t i n g s a n d l o c a t i o n s r a t i n g s have b e e n given. A rr i v e a t t h e
b e s t l o c a t i o n u s i n g t h e Fa c t o r a n d L o c a t i o n Ra t i n g m e t h o d s .

Factor Factor Location Location Location

rating Rating Rating Rating
Kanpur Noida Lucknow
1 Proximity to market 3 4 6 3

2. Proximity to raw material 5 10 5 4

3. Transportation facility 4 9 10 5

4. Basic amenities 2 6 7 6

5. Acceptance of leather factory by 4 8 3 7

locals

6. Availability of cheap land 3 7 2 8

7. Low construction costs 1 5 1 6

8. Easy availability of cheap and 3 3 8 4

skilled labour

Fa c t o r r a t i n g s a re 1 t o 5 – 5 A n d L o c a t i o n r a t i n g s a re 1 t o 1 0 –
 Sol ut i on: For e a c h l o c a t i o n fi n d t h e p r o d u c t o f
f a c t o r a n d l o c a t i o n r a t i n g s . Ad d t h e m u p fo r e a c h
location. The location having the highest product
will be the best location.
Factor Factor Location Location Location
rating Rating Rating Rating
Kanpur Noida Chennai
1 Proximity to market 3 12 18 9

2. Proximity to raw material 5 50 25 20

3. Transportation facility 4 36 40 20

4. Basic amenities 2 12 14 12

5. Acceptance of leather factory by 4 32 12 28

locals

6. Availability of cheap land 3 21 6 24

7. Low construction costs 1 5 1 6

8 Easy availability of cheap and 3 9 24 12

skilled labour
Total 177 140 131
The highest score is for Kanpur. So it is the best
 Break-Even A n a l y s i s M e t h o d
This method is based on the concept of
b rea k- even a n a l y s i s . We k n o w t h a t
t h e r e a re t w o e l e m e n t s o f c o s t , i.e.,
Fi xe d c o s t a n d Va r i a b l e c o s t .
Fi xe d cost includes capital
ex p e n d i t u re land, building
manufacturing and equipment. This is
i r re s p e c t i v e of the volume of
p ro d u c t i o n a n d w i l l b e i n c u r r e d even i f
t h e re i s n o p ro d u c t i o n .
Va r i a b l e c o s t i n c l u d e s r a w m a t e r i a l ,
labour, etc., which a re directly
i n vo l v ed i n t h e p ro d u c t i o n p ro c e s s a n d
 To t a l c o s t i s t h e s u m t o t a l o f
fi xe d cost and variable cost.
When the volume of production of
a p r o d u c t i s low , t h e c o m p o n e n t
o f i t s fi xe d c o s t i s high and
v a r i a b l e c o s t i s low.
As the volume of production
i n c re a s e s , t h e v a r i a b l e c o s t
c o m p o n e n t i n c re a s e s a n d fi xe d
c o s t c o m p o n e n t re d u c e s .
Break-even is where Total Revenue =
Total
Cost B re a ke v e n p o i n t a t w h i c h
Break Even method
Cost-volume analysis method used for industrial
locations

3 Steps in the method –

1. Determine fixed and variable costs for

each location

2. Plot the cost for each location

3. Select location with lowest total cost for

expected production volume
Cost-Volume-Profit (or Br. Even Analysis)

Revenue

TCA

FCA
Cos
t

Vo

Volume of Sales
 Break Even Analysis Method

• Location A : Annual fixed costs of sh

0.3m,
Variable Costs
- sh. 63 / unit,
Revenues sh. 68 per unit.

• Location B : Annual fixed costs sh.

0.8m,
Variable costs sh. 32
per unit, Revenues are sh.
68 per unit.
 Answer -Break Even Analysis
Method
• B E Volume = Fixed cost /
(Contribution / unit)

• VBE (A) = sh 300000 / 68-63 = 60,000

units
• VBE (B) = sh 800000 / 68-32 = 22,222
units A B
Revenue 1,700,000 1,700,00
0 units,
• At the expected demand of 25000

Variable Cost 1,575,000 800,00

0
Fixed
Total Cost
Cost 300,000 1,600,00
1,875,00 800,000
0 0
Profit (Loss) (175,000) 100,000

Location B is more attractive, even if annual fixed cost is higher

M/s Vi g n e s h S t e e l s i n t e n d s t o s e t u p a ro l l i n g
mill to ro l l d i ff e re n t g r a d e s o f h i g h c a r b o n
s t e e l s . Po t e n t i a l locations selected by the
c o m p a n y a re A l i p o re , Bhatinda and Calicut.
The c o s t structu res for each of these locations
a re s h o w n b e l o w. T h e p r o d u c t i s e x p e c t e d t o
s e l l a t Rs 1 3 0 p e r k g .
(a)Find t h e m o s t e c o n o m i c a l l o c a t i o n for a n
e x p e c t e d v o l u m e o f 6 0 0 0 k g s p e r year.
(b) E x p e c t e d p ro fi t a t t h a t l o c a t i o n .
(c) For w h a t o u t p u t i s t h e r a n g e i n e a c h l o c a t i o n
be st?
Factor Fixed Cost Variable/Kg

1 Alipur 1,50,000 75.00

2. Bhatinda 2,00,000 50.00

3. Calicut 4,00,000 25.00

 Sol ut i on: Find t h e v a r i a b l e c o s t fo r p ro d u c i n g 6 0 0 0
k g . T h e n a d d t h e fi xe d c o s t a n d v a r i a b l e c o s t t o
a rr i v e a t t h e t o t a l c o s t .
City Fixed Variable VC for TC =
Cost 6000 K (FC+VC
Cost/Kg
1 Alipur 1,50,000 75 4,50,000 6,00,000

2. Bhatinda 2,00,000 50 3,00,000 5,00,000

3. Calicut 4,00,000 25 1,50,000 5,50,000

The place having the least total cost for the volume of 6000 kg is the best location. In
this example, it is Bhatinda.
(b) Selling Price = 130 × 6000 = 780000 Profit = Selling Price –Total cost = 780,000 –
500,00 = 280,000 / year
(c) Make a table for outputs 1000,2000,3000,4000,5000,6000,7000,8000 units / year for
each location.
Qty 1000 2000 3000 4000 5000 6000 7000 8000
VC 75000 150000 225000 300000 375000 450000 525000 60000
For Alipore, breakeven is reached at 2000 T production. Why? You can0 also
draw the graph with Qty on X-axis and cost on Y-axis. The point where the
lines of Fixed cost and Variable cost meet is the breakeven point. Similarly
calculate/ draw for the other locations..
 Break-Even
Analysis
• Break-even analysis can be used for location analysis
especially when the costs of each location are
known
– Step 1: For each location, determine the fixed
and variable costs
– Step 2: Plot the total costs for each location on
one graph
– Step 3: Identify ranges of output for which each
location has the lowest total cost
– Step 4: Solve algebraically for the break-even points
over the identified ranges
• Remember the break even equations used for
calculation total cost of each location and
for calculating the breakeven quantity Q.
– Total cost = F + cQ
– Total revenue = pQ