Q&A Hero

Question

Answer: To solve for the crossover points, students should set the total cost functions equal for the various options. This gives the following equations

50,000 + 2x = 100,000 + x, x = 50,000 units

50,000 + 2x = 60,000 + 1.4x, x = 16,667 units

100,000 + x = 60,000 + 1.4x, x = 100,000 units

To check which function is the lowest cost for a given range, students should test each function for its total cost. For example

A(0) = 50000 + 2(0) = 50,000

B(0) = 100000 + 1(0) = 100,000

C(0) = 60000 + 1.4(0) = 60,000

Therefore for the range 0 to 16,667 option A is cheapest.

A(20000) = 90000

B(20000) = 120000

C(20000) = 88000

Therefore for the range 16,667 to 50,000 option C is cheapest.

A(60,000) = 170,000

B(60,000) = 160,000

C(60,000) = 144,000

Therefore for the range 50,000 to 100,000 option C is cheapest

A(110,000) = 270,000

B(110,000) = 210,000

C(110,000) = 214,000

Therefore for the range 100,000 or more option B is cheapest

Combining these ranges shows that for production of under 16,667 units A is cheapest, for between 16,667 and 100,000 C is cheapest, and for 100,000 and above B is cheapest.

Key Term: Locational cost-volume analysis

48) A grocery chain is deciding on where to locate its new distribution center (DC). The new DC will serve four grocery stores, each with a demand of 10,000 units. If the coordinates of the stores are (112,108), (110,50), (40, 85), and (10, 25) where should the DC be located? Suppose now that each store instead had demand of 20,000 units. Where should the DC go in this case?

Answer: Since each store has the same demand, the x and y coordinates can simply be averaged and the DC will be located in the same spot for each case.

X = (112 + 110 + 40 + 10)/4 = 68

Y = (108 + 50 + 85 + 25) = 67

Thus the DC should be located at (68,67) for both cases.

Key Term: Center-of-gravity method

49) Suppose that a bus company is deciding where to locate its central hub. There are 6 possible destinations for the buses. Suppose that the center of town will be used as the reference for describing the possible destinations. A is located 5 miles South and 3 miles West. B is located 3 miles North and 2 miles East. C is located 1 mile South and 5 miles East. D is located 2 miles North and 3 miles West. E is located exactly in the center of town. F is located 10 miles North and 5 miles East. Assume that traffic to each destination will be equal. Where should the hub go so that travel time is minimized?

Answer: Since each site has the same demand the coordinates can simply be averaged. Converting the center of town to (0,0) will mean that coordinates that are labeled South become -y and those labeled West become -x, while North becomes +y and East +x. Thus the location is found to be:

X= (-3+2+5-3+0+5)/6 =1

Y= (-5+3-1+2+0+10)/6=1.5

Converting back into direction yields 1 mile East and 1.5 miles North of the center of town should be the location for the hub.

Key Term: Center-of-gravity method

Section 4 Service Location Strategy

1) Service firms choose locations based, in part, on the revenue potential of a site.

Answer: TRUE

2) The location decisions of goods-producing firms will generally pay more attention to parking, access, and traffic counts than will service location decisions.

Answer: FALSE

3) Location decisions of goods-producing companies often assume that costs are relatively constant for a given area; therefore, the revenue function is critical.

Answer: FALSE

4) Which of the following is NOT among the eight determinants of revenue and volume for a service firm?

A) quality of management

B) shipment cost of finished goods

C) purchasing power of the customer-drawing area

D) uniqueness of the firm's and the competitors' locations

E) competition in the area

Answer: B

5) Which of the following is among the eight determinants of revenue and volume for a service firm?

A) uniqueness of the firm's and the competitors' locations

B) quality of the competition

C) quality of management

D) purchasing power of the customer-drawing area

E) all of the above

Answer: E

6) Traffic counts and purchasing power analysis of drawing area are techniques associated with:

A) locational cost-volume analysis.

B) a manufacturing location decision.

C) a retail or professional service location decision.

D) the factor-rating method.

E) the transportation model.

Answer: C

7) La Quinta Inns has a competitive edge over its rivals because it:

A) uses regression analysis to determine which variables most influence profitability.

B) has better television advertisements.

C) picks larger locations than its rivals.

D) builds only along interstate highways.

E) consistently receives four-star ratings for its inns.

Answer: A

8) Which of the following is NOT one of the predictive variables chosen by the profitability regression model used by La Quinta Inns?

A) the price of the inn

B) median income levels

C) the state population per inn

D) the location of nearby colleges

E) the number of inns in a region

Answer: E

9) Traffic counts and demographic analysis of drawing area are associated with:

A) the center-of-gravity method.

B) manufacturing location decisions.

C) service location decisions.

D) the transportation model.

E) locational cost-volume analysis.

Answer: C

10) Location analysis techniques typically employed by service organizations include:

A) the factor rating method.

B) the center-of-gravity method.

C) purchasing power analysis of area.

D) traffic counts.

E) all of the above.

Answer: E

11) Which of the following is most likely to affect the location decision of a service firm rather than a manufacturing firm?

A) energy and utility costs

B) attitude toward unions

C) parking and access

D) cost of shipping finished goods

E) labor costs

Answer: C

12) Which of the following is a location analysis technique typically employed by a service organization?

A) purchasing power analysis

B) linear programming

C) queuing theory

D) transportation method

E) locational cost-volume analysis

Answer: A

13) A jewelry store is more likely than a jewelry manufacturer to consider ________ in making a location decision.

A) transportation costs

B) cost of raw materials

C) appearance/image of the location

D) quality of life

E) taxes

Answer: C

14) Which of the following is a location analysis technique typically employed by a manufacturing organization?

A) transportation method

B) queuing theory

C) correlation analysis and traffic counts

D) simulation

E) demographic analysis

Answer: A

15) Which of the following assumptions is NOT associated with strategies for goods-producing location decisions?

A) Most major costs can be identified explicitly for each site.

B) Focus on identifiable costs.

C) High customer-contact issues are critical.

D) Intangible costs can be evaluated.

E) Location is a major determinant of cost.

Answer: C

16) Which of the following is most likely to affect the location strategy of a manufacturing firm?

A) appearance/image of the area

B) utility costs

C) purchasing power of drawing area

D) competition in the area

E) parking availability

Answer: B

17) Industrial firms choose locations that minimize cost, but service firms look for locations with good demographics and traffic count because these variables are indicators of good ________.

Answer: revenue or volume of business

18) Service location strategies and goods-producing location strategies rely on very different sets of assumptions. What are the assumptions associated with goods-producing locations? How do these assumptions lead to a location strategy?

Answer: The assumptions for goods-producing locations are: (1) location is a major determinant of cost; (2) most major costs can be identified explicitly for each site; (3) low customer contact allows focus on the identifiable costs; and (4) intangible cost can be objectively evaluated. On the basis of these assumptions, the location strategy for goods-producing firms is usually aimed at minimizing cost.

19) How do service facility location decisions differ from industrial location decisions in terms of the techniques used to analyze them?

Answer: Service location decisions tend to focus on the revenue function, whereas manufacturing/industrial location decisions tend to focus on costs. The service sector uses techniques such as regression analysis, traffic counts, demographic analysis, purchasing power analysis, and GIS. Services do share two methods with manufacturing firms: the factor-weighting approach and and the center-of-gravity method.

20) Identify the four predictive variables chosen by the profitability regression model used by La Quinta Inns. Identify some that were tested but not included in the final model.

Answer: The variables are: (1) the price of the inn, (2) median income levels, (3) the state population per inn, and (4) the location of nearby colleges. Some of those tested that did not have a large impact on profits include: the number of hotel rooms in the vicinity and their average room rates; local attractions such as office buildings and hospitals that drew potential customers to a 4-mile trade area; local population and unemployment rate; the number of inns in a region; and physical characteristics of the site, such as ease of access or sign visibility.

Section 5 Geographic Information Systems

1) What describes a system that stores and displays information that can be linked to a geographic location?

A) AIS

B) LOC

C) GLOC

D) LIS

E) GIS

Answer: E

Key Term: Geographic information system (GIS)

2) Geographic information systems can assist the location decision by:

A) automating center-of-gravity problems.

B) computerizing factor-rating analysis.

C) combining geography with demographic analysis.

D) updating transportation method solutions.

E) providing good Internet placement for virtual storefronts.

Answer: C

Key Term: Geographic information system (GIS)

3) Databases containing such variables as street maps, utilities, population age and income, and the software that analyzes such data for location decisions, are referred to as ________.

Answer: geographic information systems or GIS

Key Term: Geographic information system (GIS)