Business Studies: Location and Breakeven - Essay Example

Business Studies - Location/Break-Even Question Discuss the factors, which should generally be taken in making location decision. Deciding upon where to locate the next business or to shift an existing facility is one of the most important decisions that an organization makes due to its connectivity with a variety of business factors. A business might want to decide on a new location because A new business has to start off somewhere The existing location does not satisfy the business need The existing location is too costly Expansion of the business is not possible on the current location Due to some of these reasons business need to plan carefully where they want to locate their businesses. Factors other than these that really affect a business location are given below. Nearness to Raw Materials and Suppliers The business needs to be close to the raw materials especially if the business's primary function is manufacturing. The raw materials (sometimes heavy and bulky) need to be transported to the factory in time for the production. When the raw materials are available close to the production site, the uncertainty of supplier delivery becomes less and the organization can produce goods without any lead times. Also inventory would not need to be stored thus stock holding costs would also be reduced. (Unit 88) Market in Reach Having the suppliers close by is important, having the customers nearby also matters. The business revenue directly depends on the location which is easily accessible to the customer. Also it should be at such a place where the flow of customers is high or the population density is high so that the business product is exposed to the customers as much as it can. Transport Network The transport network plays a vital role in selecting a location. The raw materials need to come via a transport route. The customers have to visit the storefront and purchase the product. Therefore the road network in the immediate vicinity needs to be good. Furthermore the location should be at such a place where train/ship/plane network is close by so that connectivity to local and international business centres is maintained. (Business Review, 2003) Land The actual piece of land selected for locating the business needs to be seen from the cost point of view as well. There should be room for future expansion. For customer storefronts, spacious land with space for car parking is sometimes required. The geological stability of the land area also needs to be considered as well as the knowledge of high seismic activity zones near the area. The use of Greenfield and Brownfield sites are being increasingly used in the UK. (Unit 88) Labour For a new business finding an area where skilled labour is available is also one of the factors to be considered since the skills required for the job are not always available in the locality. For an existing business moving to another location has the problem of persuading the existing employees to start coming to the new facility. They might have to relocate their homes, or change their office hours due to traffic etc. which might cause inconvenience. (Business Review, 2003) Government Influence The government of some counties may give incentives, like low priced land, to businesses to locate in some areas. The government may want to keep industries only in industrial areas and give incentives such as subsidized land and labour rates etc. (Unit 88) Image Most storefronts bank on the type of area where they are located. For a branded store, having an outlet in the posh area of the city makes sense. Thus a business wanting to create an impression and keep its status high in order to charge premium prices from the customers would need to locate in expensive localities. (Business Review, 2003) Hassle of Relocation When the business moves to a different area, a certain bit of disruption is caused to the business activities. The suppliers may not want to come to the new location. The employees would have to change their routine or even relocate themselves. The markets may not be accessible. The quality business and the quality of life may weigh down the business activities. Question 2) What particular factors seem to be most significant in this case Indicate the advantages and disadvantages of each site. The cost of land, availability of cheap labour and the disruption of business activities by relocating are some of the factors that really come into play in the case. By relocating the land will be sold and the money used to purchase the site in Kent. Also the skilled labour available now at Bromley may not be available at Kent. Furthermore relocation will be a lot of hassle. Here are some of the advantages and disadvantages of each site; Bromley Sevenoaks Question 3) Provide (or draw) a map of the two possible sites, Bromley and Sevenoaks, and show their location links to motorways in Kent and the south east of England. The map below shows the Bromley (with the red circle) and Sevenoaks (written in bold). The two probable sites would be near these areas. The motorway M25 is close to these locations which provides a way to connect the whole of UK with these sites. Also the highways A20, A21 and A22 are also important roads that connect these sites. (Source: Axcis.co.uk) Question 4) What procedures would you undertake to obtain information on future sales, and on the costs of labour and premises at the two sites A full scale primary and secondary research will be required to obtain such information. In the primary research, personal interviews of the managers, surveys and questionnaires at the current site will need to be conducted. These very same tools should also be used at people/industries near the new Sevenoaks site. The information from primary sources may be subjective however it will help to get an idea of what costs and trends to expect on both locations. The secondary research should be done taking company's past record into consideration to predict future sales. Also an industry trend can be captured about the labour and premises costs. Then the results from both the researches should be combined and analysed to determine the actual costs and revenues at each site. Question 5) On a large scale and in a single diagram, construct a break-even chart that shows the costs and anticipated revenues (assuming a selling price of 250 per item) of both sites. From the diagram show the break-even output at both sites. At what output does Site B become more profitable than Site A. From the diagram below, it is apparent where the break-even point exists. For Site A (Bromley) the, the break-even is on the sales of around 58,000 units while for Site B (Sevenoaks) the break-even is on the sales of around 42,000 units. Since the costs of Bromley are always higher than that of Sevenoaks, Site B (Sevenoaks) is more profitable than Site A (Bromley) from the start. Break Even Chart Question 6) Confirm the accuracy of your diagram by calculating the break-even output of the two sites using the equation below for break-even output: Break-even point= fixed costs/contribution per unit Site A (Bromley) Site B (Sevenoaks) Fixed Costs 8,060,000 6,840,000 Variable Costs 112.5 per unit 93 per unit Selling Price 250 per unit 250 per unit Contribution 137.5 per unit 157 per unit Break-Even 58610 Units 43566 Units Question 7) Assuming an output of 100,000 units, calculate the margin of safety at each site. Margin of Safety is the number of units of production that can fall before the loss starts to occur. In our case the margin of safety for Site A (Bromley) is 100,000 - 58610 = 41,390 Units. In the case of Site B (Sevenoaks), the margin of safety is 100,000 - 43566 = 56,434 Units. Question 8) What changes to the external environment could significantly alter the demand for Fileco's personal organizer and hence the firm's profitability Some of the factors that can alter the demand for personal organizer can be related to the micro or the macro environment. Technological changes can outdate the personal organizer thus diminishing the demand. The prices of competing products can also change this demand. Furthermore customer income, tastes and preferences can change thus altering the demand. As far as the internal factors are concerned, the changes in price, quality and even supply of the product can alter the demand for personal organizers in the market. (Economics Network) Works Cited 1. Axcis, MultiMap, Accessed on February 18, 2008 from http://www.axcis.co.uk/map/29646.html 2. Business Review, April 2003. Business Location. Pp. 4-6 3. Economics Network, What factors affect demand Accessed on February 18, 2008 from http://www.economicsnetwork.ac.uk/advice/hyperppt.ppt 4. Sangster, Alan & Wood, Frank (1999), "Business Accounting 2", Eighth Edition, Prentice Hall: Great Britain 5. Unit 88, "Where to locate the Business". Pp. 641-647 Read More