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Locational Break-even Analysis


By
Titus T Mushawatu II
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Group 1
1.Leonella Matowa N01910376L
2.Bradely Mataruse N01910374F
3.Titus Mushawatu N01910394H
4.Munyaradzi Mutambi N01910396N
5.Lorraine Nyika N01910435H
6.Elvis Mutambu N01910397Q
7.Norleen Mutandwa N01910399W
8.Gamuchirayi Chikoto N01910336H
9.Tendai Kwamwedo N01910352X
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Presentation outline
 CVP Analysis
 CVP Assumptions
 Locational break-even steps
 CVP example
 Benefits & Limitations
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Cost-volume analysis(BEA)
 Concerned with finding the point at
which revenues & costs agree exactly.
 Break even point(BEP)-volume of output
at which neither a profit nor a loss is
incurred.
 Total Revenue(TR)=Total Costs(TC)
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CVP Analysis
Fixed costs-Business costs that are not directly
related to the level of production or output eg
rent & rates, administration costs
Variable costs-costs which vary with the level
of output eg raw materials

BEP(units)=FC/(SP-VC)

BEP($)=FC/[(S-VC)/S)
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Locational Break-Even Analysis


 Assumptions
 Fixed costs are constant
 Variable costs are linear
 Output can be closely estimated
 Only one product involved
Locational Break-Even Analysis
 Method of cost-volume analysis used
for industrial locations
 Steps
1.Determine the fixed & variable costs for
each location.
2.Identify the indifference point for each pair
of location alternatives.
3.Identify the range 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.

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Locational
Break-Even Analysis Example
As a analyst for XYZ You’re considering
setting up a new sugar milling plant in
Manresa, Sunway, or Workington. Fixed
costs per year are $30k, $60k, & $110k
respectively. Variable costs per case are
$75, $45, & $25 respectively. The price
per case is $120. What is the best
location for an expected volume of 2,000
cases per year?
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Step 1
Determine the fixed & variable costs for
each location.

Manresa Sunway Workington

Fixed costs 30,000 60,000 110,000

Variable costs 75/unit 45/unit 25/unit


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Step 2
Identify the indifference point for each pair of
location alternatives.
Crossover between Manresa & Sunway
1)Let Q1 be the demand of cases of sugar
-TC(Manresa)=30,000+75(Q1)
-TC(Sunway)=60,000+45(Q1)
At Q1 TC(Manresa)=TC(Sunway)
30,000+75Q1=60,000+45Q1
75Q1-45Q1=60,000-30,000
30Q1=30,000
Q1=1,000 cases
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Step 2
Crossover between Sunway & Workington
2)Let Q2 be the demand of cases of sugar
-TC(Sunway)=60,000+45(Q2)
-TC(Workington)=110,000+25(Q2)
At Q1 TC(Sunway)=TC(Workington)
60,000+45Q2=110,000+25Q2
45Q2-25Q2=110,000-60,000
20Q2=50,000
Q2=2,500 cases
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Step 3
Identify the range of output for which each
location has the lowest total cost.
At Q=0
TC(Manresa)=$30,000
TC(Sunway) =$60,000
TC(Workington)=$110,000
If Q<1,000, Manresa has the lowest TC
If 1,000<Q<2,500, Sunway has the lowest TC
If Q>2,500, Workington has the lowest TC
Locational
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Break-Even Crossover Chart


200000

150000
Annual Cost

100000

50000 Manresa Sunway Wrkngtn


lowest cost lowest cost lowest
cost
0
0 500 1000 1500 2000 2500 3000
Volume
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Step 4
Select the location that gives the lowest cost for
the design capacity of the new facility.
If Q=2,000
Q2(2,500)>Q(2,000)>Q1(1,000)
The location with lowest costs for 2,000 cases is
Sunway & should be chosen for the new plant.
TC(Manresa)=30,000+75(2,000)=180,000
TC(Sunway)=60,000+45(2,000)=150,000
TC(Workington)=110,000+25(2,000)=160,000
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Break-even points
Manresa(BEP)=30,000/(120-75)=667 cases
Sunway(BEP)=60,000/(120-45)=800 cases
Wkngtn(BEP)=110,000/(120-25)=1,158cases

TR at 2,000 cases=(120*2,000)=240,000
Profit=Total Revenue-Total Costs
Manresa(P)=240,000-180,000=60,000
Sunway(P)=240,000-150,000=90,000
Wrkngtn(P)=240,000-160,000=80,000
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CVP Analysis benefits


 Helps in cost control & monitoring
 Assists in devising a pricing strategy.
 Simple method of determining locational
costs, revenue & sales.
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CVP Analysis limitations


 Unrealisticassumptions
 products are not sold at the same price
at different levels of outputs;
 fixed costs do vary when output
changes.
 Variable costs do not always stay the
same
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Thank you

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