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comparative cost analysis

The practice of evaluating the comparative advantage of alternative locations with respect to the cost of production. Comparative cost analysis can serve both to judge the efficiency of existing locations and to assist with the choice of site for a new facility. The theoretical foundations are derived from variable cost analysis.

Comparative cost analysis is generally adopted when there are relatively few locations to evaluate and where the inputs involved are also few. Primary metal manufacturing lends itself to this approach. Alternative locations are identified, the cost of each of the inputs in each location is found, and these are aggregated into a figure for total cost. The cost structure of the industry can provide initial guidance on which inputs are likely to be of greatest importance to total cost. Inputs that are insignificant in the general cost structure can be omitted with little effect on the final result unless there is evidence that they may be unusually expensive in some of the locations to be considered. Inputs with constant costs in geographical space can be omitted, unless there is a subsequent analysis in which sales or revenue are considered sensitive to the total cost of production (see variable revenue analysis).

Comparative cost analysis is the most common practical means of making an informed choice among alternative locations. The major drawbacks are the difficulty of calculating total cost when more than a few inputs are involved, the problem of evaluating the effect of linkages and other external economies, and failure to incorporate the demand factor.Â (DMS)

Suggested Reading Smith, D.M. 1981: Industrial location: an economic geographical analysis, 2nd edn. New York: John Wiley.

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