Chapter 26 : Location and scale
Topic: Location decisions
To Analyse the Benefits of an Optimal
Learning Location and Drawbacks of Non-
Objectives Optimal Location
To Analyse the Quantitative Factors
Determining Location and Relocation
Decisions
Pre assessment
1 Which of the following is NOT a characteristic of location decisions?
A) They are strategic in nature
B) They are easily reversible
C) They require high-level management decisions
D) They impact the entire business
2 What is an optimal location decision?
A) A site that minimizes costs regardless of other factors
B) A location that maximizes long-term profits while balancing costs and benefits
C) A place with the highest customer footfall only
D) The cheapest site available
3 Which of these is a quantitative factor in location decisions?
A) Brand reputation
B) Employee satisfaction
C) Labour costs
D) Business culture
4 A business that relies heavily on transporting raw materials should prioritize which location factor?
A) Government incentives
B) Transport costs
C) Aesthetic appeal of the area
D) Local culture
Answers
1. B
2. B
3. C
4. B
Location decisions
Importance of Location Decisions
•Major operations management decision
•Affects productive efficiency
•Crucial to business success
Characteristics of Location Decisions
•Strategic in nature: Long-term impact on the business
•Difficult to reverse: High relocation costs
•High-level decision: Made by top management
Optimal Location
An optimal location refers to the best possible site for a business to operate, balancing various factors to
maximize long-term success. It takes into account costs, accessibility, revenue potential, labor availability, and
government incentives.
Benefits of an Optimal Location
•Maximizes long-term profits
•Balances costs and accessibility
•Considers both quantitative and qualitative factors
In practice, it is not easy to select this best site because the optimal location is nearly always a compromise
between conflicting benefits and drawbacks.
•Example 1: High street shop (high sales vs. high rent)
•Example 2: Factory in an industrial area (low costs vs. recruitment issues)
Optimal Location
Key Location Considerations
•Balancing fixed costs with customer convenience
•Balancing remote site costs with labor supply
•Weighing government grants vs. income levels
Drawbacks of a Non-Optimal Location
Quantitative Factors Determining Location and Relocation
Decisions
Site and Fixed Costs:
• Costs vary by region and country
• Greenfield vs. developed site costs
Labour Costs:
• Importance varies by industry (labour vs. capital intensive)
• Outsourcing due to lower wage rates
Transport Costs:
• High for industries using heavy raw materials
• Service businesses rely on customer accessibility
Quantitative Factors Determining Location and Relocation
Decisions
Potential Revenue:
• Location impacts sales volume and perceived value
• Premium locations can justify higher prices
Government Grants:
• Incentives for businesses in specific areas
• Relocation assistance for existing businesses
External Economies and Diseconomies of Scale:
• Related to industry concentration and local resources
Techniques for Decision Making
Once these quantitative factors have been identified and costs and revenues estimated, the
following techniques can be used to assist in the location decision
•Profit Estimates:
• By comparing the estimated revenues and costs of each location, the site with the highest
annual potential profit may be identified
•Limitation:
• Capital costs must be considered
• Higher revenue may not justify significantly higher investment
The impact of other business strategies on ratio results
The impact of other business strategies on
ratio results
Information that does not have to be published in a
company’s annual report and accounts includes
Information that does not have to be published in a company’s annual report and accounts
includes:
• details of the sales and profitability of each of the company’s products and divisions
• research and development plans of the business and proposed new products
• details of future plans for expansion or rationalisation of the business
• evidence of the company’s impact on the environment and the local community, although
this social and environmental audit is sometimes included voluntarily by companies
• future budgets or financial plans.
Are the published accounts really
accurate?
Window dressing in accounting refers to the practice of manipulating financial statements
to make a company's financial position appear more attractive than it actually is. This is
often done to impress investors, lenders, or stakeholders before financial reporting
deadlines.
•Inflating Revenue – Recording sales before they are actually earned.
•Delaying Expenses – Postponing expense recognition to improve profit figures.
•Overstating Assets – Increasing asset values to strengthen the balance sheet.
•Hiding Liabilities – Underreporting or delaying liabilities to improve debt ratios.
•Boosting Cash Balances – Borrowing money just before the reporting date to show
higher liquidity.
Information that does not have to be published in a
company’s annual report and accounts includes
Other limitations include:
• Only historic data is included. This might not be a good indicator of future performance.
• Only two years of accounting data have to be included.
• Intangible assets are rarely fully valued in the accounts which could undervalue
knowledge-based companies.
• The accounts are not always comparable with other companies if, for example, different
methods of valuing or depreciating assets have been used.
• The accounts may not be accurate. This point needs to be analysed in further detail.
Are the published accounts really
accurate?
There are several ways in which accountants might use window dressing to boost the short-term
performance of a business without actually breaking the law regarding accounting disclosure.
These include:
• selling assets, such as buildings, at the end of the financial year, to give the business more cash
and improve the liquidity position
• reducing the amount of depreciation of fixed assets, such as machines or vehicles, in order to
increase declared profit and increase asset values
• ignoring the fact that some trade receivables which have not paid for goods delivered may, in
fact, never pay: they are bad debts
• giving inventory levels a higher value than they may be worth
• delaying paying bills or incurring expenses until after the accounts have been published
