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7115 · 4.4

Location decisions — practice questions

Practice and worked examples for 7115 Location decisions. Short previews only — attempt the full question in MarkScheme against the official scheme.

Worked example 1

Electric vehicle battery maker supplies European car plants. Compare locating factory in (A) Germany near customers or (B) Eastern Europe with lower wages and government grants.

Show solution outline

Germany (near market): Lower transport cost to OEMs, skilled engineering labour, strong IP protection — but high wages and energy costs.

Eastern Europe: Lower labour, grants, growing supplier cluster — but longer delivery to some plants, training investment needed.

Decision drivers: Just-in-time contracts (4.2.2) favour proximity; grant size and labour cost gap favour East.

Recommendation: Eastern Europe if logistics reliable; keep R&D in Germany — split functions.

Worked example 2

A furniture manufacturer plans to open a new factory to produce 50,000 chairs per year. They are considering two locations: Location A (domestic) and Location B (overseas). Using the data below, calculate the total annual cost for each location and recommend a choice.

Cost FactorLocation A (Domestic)Location B (Overseas)
Annual Site Rent$200,000$80,000
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Labour Cost per chair$15$5
Material Cost per chair$25$22
Distribution Cost per chair$5$12
Government Grant (Year 1)$0$100,000
Show solution outline

Step 1: Calculate Total Variable Cost (VC) per unit for each location.

  • VC per unit = Labour Cost + Material Cost + Distribution Cost
  • Location A: 15+15 + 25 + 5=5 = 45 per chair
  • Location B: 5+5 + 22 + 12=12 = 39 per chair

Step 2: Calculate Total Annual Variable Cost for 50,000 chairs.

  • Total VC = VC per unit × Number of units
  • Location A: 45×50,000=45 \times 50,000 = 2,250,000
  • Location B: 39×50,000=39 \times 50,000 = 1,950,000

Step 3: Calculate Total Annual Cost (TC) before grant.

  • TC = Annual Fixed Cost (Rent) + Total Annual VC
  • Location A: 200,000+200,000 + 2,250,000 = 2,450,0002,450,000
  • Location B: 80,000+80,000 + 1,950,000 = 2,030,0002,030,000

Step 4: Calculate Net Cost for Year 1, including the grant.

  • Net Cost = TC - Government Grant
  • Location A: 2,450,000−2,450,000 - 0 = 2,450,0002,450,000
  • Location B: 2,030,000−2,030,000 - 100,000 = 1,930,0001,930,000

Recommendation: Based on quantitative factors, Location B is the financially superior choice. It is $520,000 cheaper in the first year and remains $420,000 cheaper annually in subsequent years (comparing total costs before the one-off grant). However, a final decision must also weigh qualitative factors. The business must consider if the cost savings in Location B outweigh potential risks like longer supply chains (higher distribution cost is already factored in), quality control challenges, and potential damage to brand image if 'Made in [Home Country]' is important to customers.

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