Location decisions — practice questions

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.

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

• VC per unit = Labour Cost + Material Cost + Distribution Cost
• Location A: $15 + $25 + $5 = $45 per chair
• Location B: $5 + $22 + $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 = $2,250,000
• Location B: $39 × 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 + $2,250,000 = $2,450,000
• Location B: $80,000 + $1,950,000 = $2,030,000

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

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

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.