Operations Management Dr Ron Lembke BREAKEVEN ANALYSIS BREAKEVEN
Operations Management Dr. Ron Lembke BREAK-EVEN ANALYSIS
BREAK-EVEN ANALYSIS Given a fixed cost, how many do we have to make to break even? § A: buy units @ $200 § B: Make on lathe: $80, 000 + $75 each § C: CNC Machining Center: § $200, 000 + $15 each Which is the cheapest way?
BREAK-EVEN ANALYSIS § If we only sell 1, which is cheapest? § If we sell a gazillion, which is cheapest?
Total Costs BREAK-EVEN Outsource Draw Lowest Fixed Cost Line Volume
Total Costs BREAK-EVEN Outsource Machining Center Volume
Total Costs BREAK-EVEN Outsource Lathe Machining Center Volume
Total Costs BREAK-EVEN Outsource Lathe Machining Center Volume
BREAK-EVEN ANALYSIS Total Costs Cost of 1, 000 units A: 200 * 1, 000 = 200, 000 B: 80, 000 + 75*1, 000 = 155, 000 C: 200, 000 + 15*1, 000 = 215, 000 300 k C A 200 k B 100 k Volume 0 1, 000
BREAK-EVEN ANALYSIS Total Costs Cost of 2, 000 units A: 200 * 2, 000 = 400, 000 B: 80, 000 + 75*2, 000 = 230, 000 C: 200, 000 + 15*2, 000 = 230, 000 400 k A 300 k B C 200 k 100 k 0 2, 000 Volume
BREAK-EVEN ANALYSIS Cost of 3, 000 units A: 200 * 3, 000 = 600, 000 B: 80, 000 + 75*3, 000 = 305, 000 C: 200, 000 + 15*3, 000 = 245, 000 A Total Costs 600 k 500 k 400 k B C 300 k 200 k 100 k 0 3, 000 Volume
BREAK-EVEN ANALYSIS § When does Lathe become cheaper than Outsourcing? § 80, 000 + 75*x = 200*x § 80, 000 = 125*x § x = 640
BREAK-EVEN ANALYSIS A 600 k Total Costs 500 k Outsource 400 k Lathe Machining Center B C 300 k 200 k 100 k 0 640 3, 000 Volume
BREAK-EVEN ANALYSIS § When does Machining Center become cheaper than Lathe? § 80, 000 + 75*x = 200, 000 + 15*x § 60*x = 120, 000 § x = 2, 000
BREAK-EVEN ANALYSIS A 600 k Total Costs 500 k Outsource Lathe Machining Center 400 k B 300 k C 200 k <= 640 Outsource 640 -2000 Lathe >= 2000 Mach Ctr 100 k 0 640 2, 000 3, 000 Volume
BREAK-EVEN PROFIT QUANTITY � How much do sales have to grow to make an investment pay off? � Fixed costs = $10, 000 � Direct labor = $1. 50 / unit � Material = $0. 75 / unit � Sales price = $4. 00 � How many units must sell to break even?
BREAK-EVEN PROFIT QUANTITY � Gross Profit per unit = $4 – ($1. 5 + $0. 75) = $1. 75 � How many units to sell to offset Fixed cost? � $10, 000 = $1. 75 * x � X = 10, 000/1. 75 = 5, 714. 3 = 5, 715 units
SUMMARY � Break-even quantity calculations � Cheapest for one unit, and a gazillion � Accurate drawing � Find break-points algebraically � Break-even � fixed profit quantity cost to develop a product, how many must sell to be profitable?
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