1.2 Suppose that IKEA is considering locating a new IKEA facility in South Africa and that the company is considering three possible locations - Johannesburg, Cape Town, and Durban - for the location of the facility.

*The company has obtained the following data for three locations:

Location Johannesburg Cape Town Durban

Total fixed costs R600 000 R1 200 000 R2 200 000

Direct material cost per unit R400 R200 R130

Direct labour cost per unit R150 R120 R100

Variable overhead per unit R200 R180 R120

The company wishes to find the most economical location for an expected volume of 5 000 units of a furniture set per year. Assume that the expected average selling price for a unit of the furniture set is R2 500.

REQUIRED:

1.2.1

Discuss the three steps involved in locational break-even analysis. (2)

1.2.2

On the basis of the data on the three locations provided above, use a locational cost-volume analysis to determine the most suitable location for the IKEA facility in South Africa. As part of the analysis, plot the cost curve for each of the three location on the same graph, determine the total cost for each location, and the expected profit for each location. For the plots, use volume from 0 to 7400 at intervals of 200. (8)