Figure 8.2 Crossover Chart for Locational Cost-Volume Analysis LO 8.4 Complete a locational cost-volume analysis graphically...

 

Transcribed Image Text:

Figure 8.2 Crossover Chart for Locational Cost-Volume Analysis LO 8.4 Complete a locational cost-volume analysis graphically and mathematically SOLUTION For each of the three locations, Mohebbi can plot the fixed costs (those at a volume of zero units) and the total cost (fixed costs + variable costs) at the expected volume of output. These lines have been plotted in Figure 8.2. cost Annual c For Athens: $180,000 $160,000 $150,000 $130,000 $110,000 For Brussels: For Lisbon: $80,000 $60,000 $30,000 $10,000 Lisbon cost curve Brussels cost curve Athens cost curve 0 Athens lowest cost L 500 1,000 Brussels lowest cost 1 1,500 2,000 Volume The crossover point for Athens and Brussels is: 2,500 Total cost $30,000+ $75(2,000) $180,000 Total cost $60,000+ $45(2,000) = $150,000 and the crossover point for Brussels and Lisbon is: Lisbon lowest cost Total cost $110,000+ $25(2,000) $160,000 With an expected volume of 2,000 units per year, Brussels provides the lowest cost location. The expected profit is: Total revenue Total cost $120(2,000) $150,000 $90,000 per year 30,000 + 75(x) = 60,000 + 45(x) 30(x)= 30,000 x = 1,000 3,000 60,000+ 45(x)= 110,000+ 25(x) 20(x) = 50,000 = 2,500 INSIGHT As with every other OM model, locational cost-volume analysis can be sensitive to input data. For example, for a volume of less than 1,000, Athens would be preferred. For a volume greater than 2,500, Lisbon would yield the greatest profit. LEARNING EXERCISE The variable cost for Lisbon is now expected to be $22 per unit. What is the new crossover point between Brussels and Lisbon? [Answer: 2,174 units.] RELATED PROBLEMS 8.16-8.19 (8.29, 8.30 are available in MyOMLab) Figure 8.2 Crossover Chart for Locational Cost-Volume Analysis LO 8.4 Complete a locational cost-volume analysis graphically and mathematically SOLUTION For each of the three locations, Mohebbi can plot the fixed costs (those at a volume of zero units) and the total cost (fixed costs + variable costs) at the expected volume of output. These lines have been plotted in Figure 8.2. cost Annual c For Athens: $180,000 $160,000 $150,000 $130,000 $110,000 For Brussels: For Lisbon: $80,000 $60,000 $30,000 $10,000 Lisbon cost curve Brussels cost curve Athens cost curve 0 Athens lowest cost L 500 1,000 Brussels lowest cost 1 1,500 2,000 Volume The crossover point for Athens and Brussels is: 2,500 Total cost $30,000+ $75(2,000) $180,000 Total cost $60,000+ $45(2,000) = $150,000 and the crossover point for Brussels and Lisbon is: Lisbon lowest cost Total cost $110,000+ $25(2,000) $160,000 With an expected volume of 2,000 units per year, Brussels provides the lowest cost location. The expected profit is: Total revenue Total cost $120(2,000) $150,000 $90,000 per year 30,000 + 75(x) = 60,000 + 45(x) 30(x)= 30,000 x = 1,000 3,000 60,000+ 45(x)= 110,000+ 25(x) 20(x) = 50,000 = 2,500 INSIGHT As with every other OM model, locational cost-volume analysis can be sensitive to input data. For example, for a volume of less than 1,000, Athens would be preferred. For a volume greater than 2,500, Lisbon would yield the greatest profit. LEARNING EXERCISE The variable cost for Lisbon is now expected to be $22 per unit. What is the new crossover point between Brussels and Lisbon? [Answer: 2,174 units.] RELATED PROBLEMS 8.16-8.19 (8.29, 8.30 are available in MyOMLab)