Operations Management Dr Ron Lembke BreakEven Analysis Given a fixed cost how many do we have to make to break even A buy units 200 B Make on lathe 80000 75 each C CNC Machining ID: 530946
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Slide1
Break-even analysis
Operations Management
Dr.
Ron
LembkeSlide2
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?Slide3
Break-Even Analysis
If we only sell 1, which is cheapest?
If we sell a gazillion, which is cheapest?Slide4
Break-Even
Volume
Total Costs
Outsource
Draw Lowest
Fixed Cost LineSlide5
Break-Even
Volume
Total Costs
Outsource
Machining
CenterSlide6
Break-Even
Volume
Total Costs
Outsource
Lathe
Machining
CenterSlide7
Break-Even
Volume
Total Costs
Outsource
Lathe
Machining
CenterSlide8
Break-Even Analysis
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
Volume
Total Costs
3
00k
2
00k
100k
1,000
A
B
C
0Slide9
Break-Even Analysis
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
Volume
Total Costs
3
00k
2
00k
100k
2
,000
400k
A
B
C
0Slide10
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
Volume
Total Costs
3
00k
2
00k
100k
3,000
400k
500k
6
00k
A
B
C
0Slide11
Break-Even Analysis
When does Lathe become
cheaper than Outsourcing?
80,000 + 75*x = 200*x
80,000 = 125*x
x = 640Slide12
Break-Even Analysis
640
Volume
Total Costs
3
00k
2
00k
100k
3,000
400k
500k
6
00k
A
B
C
0
Outsource
Lathe
Machining
CenterSlide13
Break-Even Analysis
When does Machining Center become
cheaper than Lathe?
80,000 + 75*x = 200,000 + 15*x
60*x
=
120,000
x = 2,000Slide14
Break-Even Analysis
640
2,000
Volume
Total Costs
3
00k
2
00k
100k
3,000
400k
500k
6
00k
A
B
C
0
Outsource
Lathe
Machining
Center
<= 640 Outsource
640-2000 Lathe
>= 2000 Mach
CtrSlide15
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?Slide16
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 unitsSlide17
Summary
Break-even quantity calculations
Cheapest for one unit, and a gazillion
Accurate drawing
Find break-points algebraically
Break-even profit quantity
fixed cost to develop a product, how many must sell to be profitable?