McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Break-Even Analysis Chapter 6a.

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McGraw-Hill/Irwin Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved. Break-Even Analysis Chapter 6a

6a-2 Trade-Offs  The choice of specific equipment to use in production processes can be based upon an analysis of cost trade-offs  Often the choice is between specialized and general equipment  Specialized equipment may require a higher initial investment, but can perform more efficiently over the long run  General equipment often has a lower initial investment, but lacks the efficiency of a specialized machine

6a-3 Break-Even Analysis  One means of choosing between two options is a break-even analysis  Understanding how profits (and losses) change for each option as the total number of units varies  This is particularly suitable when processes have a significant initial investment (fixed cost) and when production costs vary in proportion to the number of units produced (variable costs) Excel: Break-Even Calculations

6a-4 Example 6A.1  A manufacturer is considering three options for obtaining a machined part  Buy the part from a supplier for $200 per unit (no fixed cost) Purchase Cost = $200 x Demand  Make the part on a semi-automatic lathe for $75 per unit (fixed costs of $80,000) Purchase Cost = $80,000 + $75 x Demand  Make the part with a machining center for $15 per unit (fixed costs of $200,000) Purchase Cost = $200,000 + $15 x Demand

6a-5 Example 6A.1- Calculate Break-Even Points Break-even point A – set total cost for option 2 equal to total cost for option 3 and solve for D Break-even point B – set total cost for option 1 equal to total cost for option 2 and solve for D

6a-6 Example 6A.1- Chart the Alternatives Break-even point A. Machine center becomes efficent Break-even point B. Semiautomatic lathe becomes efficent Break-even point between machine center and buy option is not relevant