Unit 4 — Location Decisions

Why facility location matters, what factors drive it, and the three quantitative techniques used to compare candidate sites.

1. Factors Influencing Location Decisions Core syllabus concept

1Understand the Concept

A location decision is made infrequently but has long-lasting, hard-to-reverse consequences — being in the wrong place cannot usually be fixed by better management, only by moving. The textbook groups facilities into three broad types, each driven by different location priorities: heavy-manufacturing facilities (large, capital-intensive — driven by construction/land cost, proximity to raw materials, utilities, and waste disposal), light-industry facilities (smaller, cleaner — driven more by land cost, transportation cost, and proximity to markets), and retail/service facilities (smallest, least costly to build — overwhelmingly driven by proximity to customers, because "location is everything" for a business the customer has to physically visit).

Location factors are also often organised by scale, moving from broad to specific: regional/community factors (availability of raw materials, labour, utilities, taxes, legal restrictions, and — critically for services — being near customers), local factors (economic incentives, compatible industries nearby, transportation links, government policy, environmental concerns), and site-specific factors (access to utilities at that exact site, room to expand, proximity to other complementary industries).

Two more ideas from the syllabus round this out: location incentives (tax credits, relaxed regulation, job training subsidies, and infrastructure improvements that governments offer to attract facilities) and Geographic Information Systems (GIS) — computerised systems that store, analyse and visualise large volumes of spatial data, letting a firm evaluate many potential sites systematically rather than by intuition.

Your lecture also devotes two summary slides to factors in facility location planning and factors in international location planning Slides 7–8 — worth opening directly, since their content is presented as diagrams rather than bullet text.

2Simple Explanation

In simple words: Big factories care about cheap land, raw materials and utilities; small factories care more about being near markets and transport; and shops/service outlets care almost entirely about being near their customers. Location decisions get evaluated at three zoom levels — the region, the local area, and the exact site.

3Example

📦 Example

A cement plant (heavy manufacturing) locates near limestone deposits and rail lines despite the remote location, because raw-material and transportation costs dominate. A garment export unit (light industry) locates in an industrial park near a port for easy access to global markets. A coffee chain outlet (retail/service) pays a premium for a high-footfall city-centre location because customer proximity outweighs rent — exactly the logic Amazon India applies at a much larger network scale, discussed in the Amazon India case study.

4Important Points

Three facility types: heavy manufacturing, light industry, retail/service — each weighs location factors differently.
Three levels of location analysis: regional/community, local, and site-specific.
Service/retail location decisions are made more frequently than manufacturing ones, and are dominated by customer access.
Location incentives (tax credits, regulatory relief, job training, infrastructure) can tip a decision between similar sites.
GIS tools let firms integrate and analyse large amounts of spatial data for site selection.

5Exam-Ready Answer

✍ Exam Answer

Location decisions are infrequent but highly consequential, since a poor location is difficult to correct without relocating entirely. The factors that matter depend on the type of facility: heavy-manufacturing facilities are driven by construction and land costs, proximity to raw materials, utilities, and waste-disposal options; light-industry facilities weigh land and transportation costs alongside proximity to markets; and retail or service facilities are dominated by proximity to customers, since the customer must physically reach the facility. Location analysis is typically carried out at three levels: the regional level (availability of raw materials, labour, and utilities, and applicable taxes or legal restrictions), the local level (economic incentives, compatible surrounding industries, transportation access, and government policy), and the site level (access to utilities, room for expansion, and proximity to complementary businesses). Governments also influence location decisions through incentives such as tax credits, relaxed regulation, job-training support, and infrastructure improvements, while tools such as Geographic Information Systems (GIS) allow firms to integrate large amounts of spatial data to evaluate candidate sites systematically.

▤ Point-Wise Exam Answer

Fits: 4 / 5 marks — asked in both past papersVerb: Analyse · Evaluate · Compare

Definition. Location decisions determine where a facility is sited. They are strategic because they are long-term, capital-intensive and very hard to reverse, and because location fixes a large part of the firm's permanent cost structure and its access to customers.

Why location is a strategic decision

Commits large capital for decades — you cannot re-optimise it next quarter.
Fixes transport, labour and utility costs for the life of the facility.
Determines proximity to customers, and therefore achievable delivery lead time.
Affects the ability to recruit the skills the process needs.

The general factors

Proximity to markets / customers — delivery speed, freight cost on finished goods.
Proximity to raw materials and suppliers — decisive where inputs are bulky or perishable.
Labour — availability, skill level, wage rates, unionisation, productivity.
Transportation and infrastructure — road, rail, port, air connectivity.
Utilities — reliable power, water, fuel, telecom.
Land and construction costs, and room to expand.
Government policy — taxes, subsidies, SEZ incentives, environmental and zoning regulation.
Community and quality of life — schools, housing, climate; affects recruitment and retention.
Waste disposal and environmental impact.

Retail/service vs heavy industry — the comparison both papers asked for

Factor	Retail & service	Heavy industry
Proximity to customers	Decisive — as near as possible; "location is everything"	Less important — output is shipped
Land cost	Usually high and accepted, because footfall justifies it	Must be minimum — large area needed
Construction cost	Less important	Should be minimum — heavy structures, foundations
Labour cost	Less important	Important — seeks minimum wage areas, large workforce
Transportation	Must be well connected for customer access	Mode for raw material inward and finished goods outward must be available and connected
Raw materials	Not a factor	Proximity essential — bulky, heavy inputs
Utilities	Standard requirements	Heavy power and water demand — a primary constraint
Waste disposal	Minor	Major — means of disposal must exist
Example	Retail chain in a high-street mall	Steel plant near ore and coal fields with port access

The underlying logic to state

Locate near the customer when the output is the expensive thing to move, or when the customer must come to you (all services).
Locate near the input when raw material is bulky, heavy or perishable and loses weight in processing.
Everything else — labour, land, incentives — is a tie-breaker between candidates that already satisfy the primary pull.

Closing line: location cannot be optimised in the abstract — the right factors to weight depend entirely on whether the customer or the raw material is the more expensive thing to move.

6Possible Exam Questions

Explain the factors influencing location decisions for a manufacturing firm versus a service firm.
Discuss the three levels at which location factors are typically analysed.
What are location incentives? Give examples.
A company is deciding between two cities for a new customer-service call centre. What location factors should dominate its decision, and why?

7Common Mistakes

⚠ Common Mistakes

Applying the same weight to all location factors regardless of facility type — a heavy-manufacturing plant and a retail store should not be evaluated by the same priority list.

▶ Watch — Location decisions and their factors

Your faculty was explicit that the location methods carry no numerical solving — you will be given a scenario and asked which method fits and why. Watch these for what each method is for; skim the arithmetic.

Sources

Primary reference Russell & Taylor, Operations Management, Ch. 7 Supplement, pp. 297–301 — "Types of Facilities," "Site Selection," "Geographic Information Systems."

Additional reference Facility Location — Unit 4 lecture PPT — "Types of Facilities," "Three Stage Location Decision," "Location Incentives." Slides 3–12

2. Location Factor Rating Method Core syllabus concept

1Understand the Concept

Most real location decisions involve both quantitative factors (like cost) and qualitative factors (like quality of life or labour attitudes) that can't easily be reduced to a single dollar figure. The factor rating method gives a structured, transparent way to combine many such factors — of very different types — into one comparable score per site.

2Formula / Method

Weighted Score for a site = Σ (Weight of factor_i × Score of factor_i at that site)

3Step-by-Step Method

Identify the important factors relevant to the decision (e.g., labour cost, transportation, proximity to market).
Assign each factor a weight between 0.00 and 1.00, reflecting its relative importance, so that all weights sum to 1.00.
Score each site on each factor, typically on a 0–100 scale, based on how well that site satisfies the factor.
Multiply each factor's weight by its score for a site, and sum these weighted scores to get the site's total score.
Choose the site with the highest total weighted score.

4When to Use It

Use factor rating whenever a location decision depends on several factors of different (and often non-monetary) types that still need to be compared on one common scale — it is the most flexible of the three techniques because it can absorb qualitative judgement alongside quantitative data.

5Worked Example Illustrative example — from course lecture PPT, in the format of the textbook's technique

A university is choosing among 4 sites for a new athletic/dining complex, scored on 7 factors:

Factor	Weight	Site 1	Site 2	Site 3	Site 4
Auto traffic flow	0.25	70	75	84	68
Student/dorm concentration	0.20	65	91	85	96
Parking availability	0.15	100	83	90	92
Utilities	0.15	87	96	80	85
Proximity to merchants	0.10	69	85	80	95
Drainage	0.10	50	68	92	77
Aesthetics	0.05	86	100	95	80

Weighted totals: Site 1 = 74.75, Site 2 = 84.10, Site 3 = 85.45, Site 4 = 83.95.

Site 3 scores highest, though Sites 2, 3 and 4 are close — the technique's main value here is decisively ruling out Site 1, and prompting a closer qualitative look at the top three.

6Important Points

Weights must sum to 1.00; scores are typically on a 0–100 scale.
Can combine subjective (qualitative) and objective (quantitative) factors on one scale.
The site with the highest total weighted score is preferred.
When scores are close, the technique is most useful for eliminating clearly weak options rather than making the final call by itself.

7Exam-Ready Answer

✍ Exam Answer

The location factor rating method is a technique for comparing candidate sites using multiple factors of differing importance and nature, including both quantitative and qualitative considerations. The method involves identifying the relevant factors, assigning each a weight between 0 and 1 that reflects its relative importance (with all weights summing to 1), scoring each site on each factor (commonly on a 0–100 scale), multiplying each score by its weight, and summing these weighted scores to obtain a total score for each site. The site with the highest total weighted score is selected. This method is particularly useful because it allows decision-makers to systematically incorporate subjective factors, such as quality of life or community attitude, alongside objective factors like cost, within a single comparable framework, though when the top sites score closely, the result is best used to narrow down options rather than as the sole basis for the final decision.

▤ Point-Wise Exam Answer

Fits: 2 / 4 marksVerb: Explain · Justify choice of method

Definition. The location factor rating method is a structured way of comparing candidate sites on several factors at once, including qualitative ones, by weighting each factor by importance, scoring each site on each factor, and choosing the site with the highest weighted total.

The steps

Identify the factors that matter for this decision.
Assign each factor a weight reflecting its relative importance (weights sum to 1 or 100).
Score each candidate location on each factor, on a common scale (e.g. 1–100).
Multiply weight × score for each factor and sum to get a weighted total per site.
Choose the site with the highest weighted score.

Weighted score for a site = Σ (weight of factor × score on that factor)

When to use it — the justification an exam wants

When the decision involves qualitative factors that have no natural money value — community attitude, quality of life, political stability, proximity to a university.
When factors are not equally important and you need that difference reflected explicitly.
When you must justify a choice to others — the method makes the reasoning visible and auditable.
When comparing a small set of already-shortlisted sites.

Strengths and limitations

Strengths	Limitations
Handles qualitative and quantitative factors together	Weights and scores are subjective — different managers get different answers
Simple, transparent, easy to explain	Assumes factors are independent and additive
Forces explicit discussion of what matters	A high score on one factor can mask an unacceptable score on another
Works with any number of factors and sites	Does not itself produce a cost figure

Example

An IT services firm choosing between Pune, Hyderabad and Chennai weights availability of engineering talent at 0.35, office rent at 0.20, connectivity at 0.20, quality of life at 0.15 and state incentives at 0.10. Talent dominates because for this firm it is the binding constraint — and stating why a weight is high is exactly what earns the marks.

Closing line: factor rating is chosen when the decisive considerations cannot be reduced to rupees — it makes judgement explicit rather than pretending the problem is purely arithmetic.

8Common Mistakes

⚠ Common Mistakes

Forgetting that weights must sum to 1.00 before scoring.
Multiplying scores by weights incorrectly, or summing the raw scores instead of the weighted scores.
Declaring a winner without noting how close the competing scores are, when relevant.

▶ Watch — Factor rating method

Sources

Primary reference Russell & Taylor, Operations Management, Ch. 7 Supplement, p. 302 — "Location Factor Rating."

Additional reference Facility Location — Unit 4 lecture PPT — "Location Factor Rating," State University worked problem. Slides 14–18

3. Center-of-Gravity Technique Core syllabus concept

1Understand the Concept

When a firm needs to locate one central facility (like a distribution centre) that serves several existing points (like suppliers, stores, or customers), the centre-of-gravity technique finds the coordinates that minimise total weighted transportation distance — treating each existing location's shipment volume as a "weight" pulling the ideal site toward it, much like a physical centre of gravity.

2Formula

x* = Σ(x_i · W_i) / ΣW_i y* = Σ(y_i · W_i) / ΣW_i

where (x_i, y_i) are the coordinates of existing location i, and W_i is the volume/weight shipped to or from that location.

3When to Use It

Use this when you are locating a single new facility relative to several already-fixed points, and you have both coordinates and shipment volumes for each of those points.

4Worked Example

A restaurant chain sources from 4 suppliers and wants to locate a central distribution centre.

	A	B	C	D
x	200	100	250	500
y	200	500	600	300
Weight (loads/yr)	75	105	135	60

x* = [(200×75)+(100×105)+(250×135)+(500×60)] / (75+105+135+60) = 91,500 / 375 ≈ 238

y* = [(200×75)+(500×105)+(600×135)+(300×60)] / 375 = 166,500 / 375 ≈ 444 → Centre of gravity ≈ (238, 444)

5Important Points

Weights are shipment volumes (loads, tonnes, trips) — not importance ratings like in factor rating.
Produces one specific (x, y) coordinate, not a ranked comparison of pre-defined candidate sites.
The resulting point minimises weighted distance — it may not correspond to any real, usable plot of land, so it is usually treated as a starting reference point for a real-world site search nearby.

6Exam-Ready Answer

✍ Exam Answer

The centre-of-gravity technique locates a single new facility, such as a warehouse or distribution centre, relative to a set of existing locations such as suppliers or stores, by finding the coordinates that minimise total weighted transportation distance. Each existing location is assigned an x and y coordinate on a grid map along with a weight representing the volume shipped to or from it, and the coordinates of the new facility are computed as the weighted average of the x-coordinates and the weighted average of the y-coordinates, using shipment volume as the weight. The resulting point identifies the location that keeps the facility as close as possible to the highest-volume locations, minimising overall transportation cost. Because the computed point is a mathematical result rather than a guaranteed real, developable site, it is generally used as a starting reference for evaluating actual nearby locations rather than as the final decision by itself.

▤ Point-Wise Exam Answer

Fits: 2 / 4 marksVerb: Explain · Justify choice of method

Definition. The centre-of-gravity technique finds the location for a single facility that minimises total weighted transportation cost to a set of existing destinations, by computing a demand-weighted average of their map coordinates.

x̄ = Σ(xᵢ · Wᵢ) / Σ Wᵢ ȳ = Σ(yᵢ · Wᵢ) / Σ Wᵢ where xᵢ, yᵢ = coordinates of destination i Wᵢ = volume/weight shipped to destination i

The steps

Place a coordinate grid over the map of existing locations.
Read off the (x, y) coordinates of each destination.
Record the volume shipped to each.
Compute the volume-weighted average of x and of y.
The resulting point is the theoretical least-cost location.

When to use it — the justification an exam wants

When the objective is explicitly minimising transportation cost, and transport cost dominates the decision.
When siting a facility that serves multiple known destinations — a distribution centre, warehouse, or central depot.
When the volumes to each destination are known and differ — the weighting is the whole point.
When you need a starting point for a search, rather than a final answer.

Assumptions and limitations — the critical marks

Assumes cost is directly proportional to distance and volume, with no fixed cost per trip.
Assumes straight-line travel — ignores actual road networks, rivers, mountains, one-way systems.
Ignores everything non-transport: land cost, labour, taxes, zoning.
The computed point may be physically unusable — a lake, a runway, protected land.
Therefore: it gives an approximate centre to search around, and its answer must then be screened by factor rating against real candidate sites.

Example

An e-commerce firm siting one warehouse to serve Delhi, Jaipur, Lucknow and Chandigarh. Because Delhi takes 50% of the volume, the centre of gravity pulls strongly towards Delhi even though it is not geographically central — which is exactly the insight the method exists to provide.

Closing line: centre of gravity answers "where is the transport-optimal point?" — it never answers "where should we build?", which is why it is always followed by a qualitative screen.

7Common Mistakes

⚠ Common Mistakes

Computing a simple (unweighted) average of coordinates instead of a weighted average.
Treating the resulting (x*, y*) as a guaranteed final answer rather than a reference point for further site evaluation.

▶ Watch — Centre-of-gravity technique

Sources

Primary reference Russell & Taylor, Operations Management, Ch. 7 Supplement, pp. 304–305 — "Center-of-Gravity Technique."

Additional reference Facility Location — Unit 4 lecture PPT — restaurant-chain worked example. Slides 19–27

4. Load-Distance Technique Core syllabus concept

1Understand the Concept

The load-distance technique is a variation of the centre-of-gravity approach used when you already have a short-list of specific candidate sites (rather than needing to compute an ideal coordinate from scratch). For each candidate site, it computes a composite score combining how much is shipped (load) and how far it has to travel (distance) to/from every existing location, and picks the site with the lowest total.

2Formula

LD = Σ (l_i · d_i) where d_i = √[(x_i − x)² + (y_i − y)²]

l_i = load (weight, trips, or units) shipped from the proposed site to existing location i; d_i = straight-line distance between the proposed site (x, y) and existing location i (x_i, y_i).

3When to Use It

Use load-distance when you already have a few real candidate sites to evaluate (unlike centre-of-gravity, which generates a coordinate). The site with the lowest LD value is preferred, since it represents the minimum combined weight-distance burden, and therefore the lowest transportation cost.

4Worked Example

A company evaluates 3 candidate sites for a warehouse against 4 existing stores (A, B, C, D) with known coordinates and annual shipments (loads):

Site 3 distances: d_A=44.7, d_B=86.0, d_C=5.0, d_D=50.0, with loads w_A=145, w_B=210, w_C=160, w_D=95:

LD(Site 3) = (44.7×145)+(86.0×210)+(5×160)+(50×95) = 30,092

Computed the same way, Site 1 gives LD = 31,012 and Site 2 gives LD = 31,400. Since 30,092 is the lowest, Site 3 is selected.

5Important Points

Distance can be straight-line (as in the formula above) or actual road distance, depending on what data is available.
Unlike centre-of-gravity, load-distance compares given candidate sites rather than generating an ideal coordinate.
Lower LD value = better site (minimum weighted transportation burden).

6Exam-Ready Answer

✍ Exam Answer

The load-distance technique evaluates a set of specific candidate locations by computing, for each candidate, a composite load-distance value equal to the sum of the load shipped to or from each existing facility multiplied by the distance between the candidate site and that facility. Distance is typically calculated using the straight-line distance formula between coordinates. The candidate site with the lowest total load-distance value is preferred, since it represents the minimum combined weight-and-distance burden and therefore the lowest expected transportation cost. Unlike the centre-of-gravity technique, which computes an ideal coordinate from scratch, the load-distance technique is used to rank and choose among a given shortlist of real candidate sites, making it a natural next step once a set of feasible locations has already been identified.

▤ Point-Wise Exam Answer

Fits: 2 / 4 marksVerb: Explain · Compare with other methods

Definition. The load–distance technique evaluates a set of specific candidate locations by computing, for each, the sum of (load × distance) to all destinations, and selecting the location with the lowest load–distance score.

LD = Σ (lᵢ × dᵢ) where lᵢ = load (volume, trips) between the site and destination i dᵢ = distance between the site and destination i

The steps

List the candidate sites actually available.
For each candidate, measure the distance to every destination.
Multiply each distance by the load moved on that route.
Sum across destinations to get that site's load–distance score.
Choose the site with the lowest score.

How it differs from centre of gravity — the comparison that earns marks

Basis	Centre of gravity	Load–distance
What it produces	Generates a new coordinate — a point that may not be a real site	Evaluates sites that already exist and are available
Question answered	"Where ideally should we be?"	"Which of these should we pick?"
Distance used	Implicit straight-line from coordinates	Any distance measure — including actual road distance
Best score	Not a score — an output location	Lowest LD total wins
Stage of the decision	Early — narrowing the search area	Later — choosing among shortlisted sites

When to use it

When you already have a shortlist of real, available sites.
When you can measure actual travel distance rather than assuming straight lines — its main advantage over centre of gravity.
When transport/movement cost is the dominant criterion, but the geography is irregular.
Also used inside a facility, to evaluate department arrangements in process layout (Unit 5).

Example

A city bus depot choosing among three available plots. Centre of gravity might point to a spot in the middle of a river; load–distance compares only the three real plots using actual road distances, and correctly picks the one whose road access is best even though it is not the most central.

Closing line: the two methods are complements, not rivals — centre of gravity tells you where to look, load–distance tells you which of the sites you actually found is best.

7Common Mistakes

⚠ Common Mistakes

Picking the site with the highest LD value instead of the lowest.
Forgetting to square, sum, and then take the square root when computing straight-line distance.
Confusing load-distance (compares given sites) with centre-of-gravity (derives a new coordinate) — they answer different questions.

▶ Watch — Load–distance technique

Sources

Primary reference Russell & Taylor, Operations Management, Ch. 7 Supplement, pp. 305–307 — "Load-Distance Technique."

Additional reference Facility Location — Unit 4 lecture PPT — Wiley's Food Market worked example. Slides 28–34

5. Location Breakeven Analysis Supporting concept

1Concept — What Is It Solving?

Factor rating, centre-of-gravity and load-distance all compare locations on distance and preference. But candidate locations also differ in their cost structure — land, labour, utilities and taxes vary from place to place, so each location has its own fixed cost and its own variable cost per unit. Location breakeven analysis compares locations on that basis: it applies the same breakeven logic used for process selection in Unit 6, but with each candidate location as an alternative rather than each candidate process Slide 35.

Each location gives a total-cost line, TC = Fixed Cost + (Variable cost per unit × Volume). A location with low fixed cost but high variable cost is cheapest at low volumes; a location with high fixed cost but low variable cost overtakes it once volume is large enough. Plotting all the candidate locations' cost lines against the expected production volume shows which location is cheapest over which volume range, and the crossover points between lines are the volumes at which the preferred location changes.

2Simple Explanation

In simple words: Every candidate location has its own "setup cost" and its own "cost per unit." Draw a cost line for each, then look at how much you actually expect to produce — whichever line is lowest at that volume is the cheapest location. Change the volume and the answer can change.

3Step-by-Step Method

Determine the fixed cost and variable cost per unit for each candidate location.
Write each location's total cost line: TC = FC + (VC × volume).
Plot all lines on the same axes (cost on the vertical axis, volume of production on the horizontal), or solve algebraically by equating pairs of lines to find crossover volumes.
Identify the expected production volume, and select the location whose total cost is lowest at that volume.

4Worked Example Illustrative example

Two candidate locations for a plant. Location A: fixed cost ₹5,00,000/year, variable cost ₹80/unit. Location B: fixed cost ₹12,00,000/year, variable cost ₹50/unit.

Set the two total-cost lines equal to find the crossover volume:

5,00,000 + 80v = 12,00,000 + 50v → 30v = 7,00,000 → v ≈ 23,333 units/year

Interpretation: below about 23,333 units per year, Location A (lower fixed cost) is cheaper; above it, Location B (lower variable cost) is cheaper. The decision therefore depends entirely on the demand forecast, which is why this technique is used alongside factor rating rather than instead of it.

5Important Points

Each location has its own fixed cost and variable cost, producing a different total-cost line.
Low FC / high VC locations win at low volumes; high FC / low VC locations win at high volumes.
The crossover volume is found by equating two locations' total-cost equations.
This technique considers cost only — it must be combined with factor rating for qualitative factors, and with centre-of-gravity/load-distance for transportation distance.

6Exam-Ready Answer

✍ Exam Answer

Location breakeven analysis compares candidate locations on the basis of their cost structures, recognising that land, labour, utility and tax costs differ between locations so that each candidate has its own fixed cost and its own variable cost per unit. For each location, a total cost line is constructed as total cost equals fixed cost plus variable cost per unit multiplied by the volume of production. These lines are then plotted together against volume, or compared algebraically by equating pairs of lines to determine the crossover volumes at which the preferred location changes. A location with a low fixed cost but a high variable cost is the least expensive option at low volumes, whereas a location with a high fixed cost but a low variable cost becomes cheaper once volume is sufficiently large. The firm therefore identifies its expected production volume and selects the location whose total cost is lowest at that volume. Because this technique evaluates cost alone, it is used alongside the location factor rating method, which incorporates qualitative factors, and the centre-of-gravity and load-distance techniques, which address transportation distance.

▤ Point-Wise Exam Answer

Fits: 2 / 4 marksVerb: Explain · Interpret a given result

Definition. Location breakeven analysis compares candidate locations on total cost as a function of output volume, by plotting each site's fixed plus variable cost line and identifying the volume ranges over which each site is cheapest.

Total cost at a site = Fixed cost + (Variable cost per unit × Volume) TC = F + vQ Indifference (breakeven) volume between two sites A and B: F_A + v_A·Q = F_B + v_B·Q ⟹ Q = (F_B − F_A) / (v_A − v_B)

The steps

Determine the fixed cost and the variable cost per unit at each location.
Write the total cost line for each.
Find the indifference volume between each pair — where two lines cross.
Plot all lines on one graph of cost against volume.
Read off which site has the lowest line over each volume range.

How to interpret the result — the application skill

The answer is never a single location — it is a rule: below volume X choose A, between X and Y choose B, above Y choose C.
The general pattern: low fixed / high variable cost wins at low volume; high fixed / low variable cost wins at high volume. That is the capital-versus-labour trade-off in one line.
Therefore the real question becomes a forecasting question: what volume do we actually expect, and how confident are we?
If expected volume sits close to an indifference point, the choice is fragile — prefer the more flexible option.

Assumptions and limitations

Assumes fixed costs are constant and variable cost per unit is linear — no volume discounts, no diseconomies.
Assumes revenue and selling price are the same at every location.
Ignores every qualitative factor — so it is a cost screen, not a decision.
Only as good as the volume forecast it rests on.

Example (reading a result, not computing one)

Told that three processes have indifference points at 10,000 and 30,000 units, you should be able to state the decision rule directly: below 10,000 choose the low-fixed-cost option; between 10,000 and 30,000 the middle option; above 30,000 the high-fixed/low-variable option — and explain that this is because heavy automation only repays its fixed cost once volume is large enough to spread it.

Closing line: breakeven analysis converts a location choice into a volume forecast — which is why its most important output is not the crossover number but the awareness of how close you expect to operate to it.

7Possible Exam Questions

Explain location breakeven analysis. How is it different from process-selection breakeven analysis?
Given the fixed and variable costs of two locations, find the volume at which the preferred location changes.
Why should location breakeven analysis not be used as the sole basis for a location decision?

8Common Mistakes

⚠ Common Mistakes

Picking the location with the lowest fixed cost regardless of expected volume — the answer depends on where the expected volume falls relative to the crossover.
Presenting it as a complete location decision; it ignores every non-cost factor.

▶ Watch — Location breakeven analysis

Sources

Primary Facility Location — Unit 4 lecture PPT — different breakeven volumes for four location options with different FC and VC values Slide 35

Note Location-specific breakeven analysis is not presented under this heading in the assigned textbook edition; the underlying breakeven mechanics are textbook material from Ch. 6 pp. 230–233, applied here to locations as your lecture does.

🧠 See also: Case-Based Application

The Amazon India case study in the Case-Based Questions section asks you to apply factor rating, centre-of-gravity, and load-distance together to a real network-location problem — a good way to test whether you can choose the right technique for a case, not just execute a given formula.

Unit 04 — Location Decisions

1. Factors Influencing Location Decisions Core syllabus concept

1Understand the Concept

2Simple Explanation

3Example

4Important Points

5Exam-Ready Answer

Why location is a strategic decision

The general factors

Retail/service vs heavy industry — the comparison both papers asked for

The underlying logic to state

6Possible Exam Questions

7Common Mistakes

2. Location Factor Rating Method Core syllabus concept

1Understand the Concept

2Formula / Method

3Step-by-Step Method

4When to Use It

5Worked Example Illustrative example — from course lecture PPT, in the format of the textbook's technique

6Important Points

7Exam-Ready Answer

The steps

When to use it — the justification an exam wants

Strengths and limitations

Example

8Common Mistakes

3. Center-of-Gravity Technique Core syllabus concept

1Understand the Concept

2Formula

3When to Use It

4Worked Example

5Important Points

6Exam-Ready Answer

The steps

When to use it — the justification an exam wants

Assumptions and limitations — the critical marks

Example

7Common Mistakes

4. Load-Distance Technique Core syllabus concept

1Understand the Concept

2Formula

3When to Use It

4Worked Example

5Important Points

6Exam-Ready Answer

The steps

How it differs from centre of gravity — the comparison that earns marks

When to use it

Example

7Common Mistakes

5. Location Breakeven Analysis Supporting concept

1Concept — What Is It Solving?

2Simple Explanation

3Step-by-Step Method

4Worked Example Illustrative example

5Important Points

6Exam-Ready Answer

The steps

How to interpret the result — the application skill

Assumptions and limitations

Example (reading a result, not computing one)

7Possible Exam Questions

8Common Mistakes