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Sem 5 Prep
← OperationsFactor rating and cost-profit-volume

Formulas for this chapter

Factor rating composite score

Composite score = SUM (weight x score) over all factors

When several factors matter and most cannot be priced. Weights usually sum to 1.00; if they do not, use them as given.

weight
Relative importance of the factor, usually summing to 1.00
score
This location's rating on that factor, usually 0 to 100

Total cost at a location

Total cost = FC + v x Q

Comparing locations on cost at a known volume. Add any other cost the choice changes, such as system transport cost.

FC
Fixed cost for the period
v
Variable cost per unit
Q
Quantity or volume of output for the period

Crossover volume

FC1 + v1 x Q = FC2 + v2 x Q Q = (FC1 - FC2) / (v2 - v1)

To find the volume where the cheaper location changes, and so to state the superiority ranges.

FC1, FC2
Fixed costs of the two locations
v1, v2
Variable costs per unit of the two locations

Total profit at a location

Total profit = Q(R - v) - FC

When a selling price is given. (R - v) is the contribution per unit; set two sites equal to get the indifference volume.

R
Revenue or dealer price per unit
v
Variable cost per unit at that site
FC
Fixed cost for the period at that site
Step 1 of 21
The ideaTheory

Two ways to argue about a map

Two managers argue about where to put a shop. One says "the rent is lower on the ring road". The other says "but nobody walks past it".

Factor rating settles the second argument: score everything that matters, including the things with no price. Cost-profit-volume settles the first: at what sales volume does the cheap rent actually win?

The exam usually gives you one of them. Occasionally it gives you both and asks which you trust.

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