1. Cost-Volume Tradeoffs
Operations Management
Dr. Ron Lembke
Cost-Volume Tradeoffs

2. 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?

3. 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

4. Cost-Volume tradeoff
Given a fixed cost, how many do we have to make to break even?
A: buy $200
B: Make on lathe: $80,000 + $75 each
C: CNC Machining Center:
$200,000 + $15 each
Which is the cheapest way?

5. Cost-Volume tradeoff If we only sell 1, which is cheapest?
If we sell a gazillion, which is cheapest?

6. Cost-Volume tradeoff Outsource Total Costs Draw Lowest Fixed Cost Line

7. Cost-Volume tradeoff
Outsource
Total Costs
Machining
Center
Volume

8. Cost-Volume tradeoff Outsource Total Costs Lathe Machining Center

9. Cost-volume Tradeoff Outsource Total Costs Lathe Machining Center

10. Cost-volume Tradeoff
Cost of 1,000 units A: 200 * 1,000 = 200,000 B: 80, *1,000 = 155,000 C: 200, *1,000 = 215,000
300k
200k
100k C
Total Costs A B
Volume
1,000

11. Cost-volume Tradeoff
Cost of 2,000 units A: 200 * 2,000 = 400,000 B: 80, *2,000 = 230,000 C: 200, *2,000 = 230,000
400k A
Total Costs
300k B C
200k
100k
2,000
Volume

12. Cost-volume Tradeoff
Cost of 3,000 units A: 200 * 3,000 = 600,000 B: 80, *3,000 = 305,000 C: 200, *3,000 = 245,000 A
600k
500k
Total Costs
400k B
300k C
200k
100k
Volume
3,000

13. Cost-volume Tradeoff When does Lathe become cheaper than Outsourcing?
80, *x = 200*x
80,000 = 125*x
x = 640

14. Cost-volume Tradeoff Volume Total Costs A B C Machining Center
300k
200k
100k
3,000
400k
500k
600k A B C
Machining
Center
Outsource
Lathe
640

15. Cost-volume Tradeoff
When does Machining Center become cheaper than Lathe?
80, *x = 200, *x
60*x = 120,000
x = 2,000

16. Cost-volume Tradeoff Volume Total Costs A B C Machining Center
300k
200k
100k
3,000
400k
500k
600k A B C
Machining
Center
Outsource
Lathe
<= 640 Outsource
Lathe
>= 2000 Mach Ctr
640
2,000

17. Summary Cost-Volume Tradeoff calculations Break-even profit quantity
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?