5.4 LOCATION: ACTIVITY A Read the information below and answer the questions that follow. 26 marks, 45 minutes PROFITS IN DIFFERENT LOCATIONS Site A - city centre location Site B - shopping arcade out of the city Estimated annual costs (including rent and 975 000 498 000 labour costs) Expected annual sales (units) 25 000 17 000 Forecast selling price per unit 50 45 1. Calculate the estimated annual profit from these two possible locations for a mobile- phone shop. [4 marks] 2. In future years, explain why the annual profits made from each location might change. [6 marks] WHICH IS THE BEST INVESTMENT? TLC Cosmetics is planning to open a new branch of its shops selling upmarket cosmetics. The company has expanded rapidly and it has substantial loans. Some economists are predicting an increase in interest rates by the Bank of England. Length of time to repay initial capital (payback period) cost Annual profit made as % of initial cost Site X - capital cost 2 million Site Y-capital cost 2 million 2.5 years 12% 3.8 years 14% 1. Recommend which of the two sites the company should choose for its new shop. [8 marks] WHICH SITE COVERS ITS COSTS AT A LOWER OUTPUT LEVEL? ICT Chemicals Ltd plans to open a new paint factory with a maximum capacity of 10 million litres per year. It has narrowed its choices down to Site C in the UK, located five miles away from a large city and Site D in a less economically developed country with very low labour wage rates and few health and safety controls. The figures exclude transport costs. The expected annual production level is 6 million litres. Site C Site D Level of output needed to cover all costs 4 million litres 2 million litres (break-even output) 1. Evaluate Site C as a location decision. [8 marks]