1. Table of Contents Chapter 1 (Introduction) Special Products Break-Even Analysis (Section 1.2)1.2 – 1.7 Copyright © 2011 by the McGraw-Hill Companies, Inc. All rights reserved. McGraw-Hill/Irwin

2. 1-2 Special Products Break-Even Analysis The Special Products Company produces expensive and unusual gifts. The latest new-product proposal is a limited edition grandfather clock. Data: –If they go ahead with this product, a fixed cost of $50,000 is incurred. –The variable cost is $400 per clock produced. –Each clock sold would generate $900 in revenue. –A sales forecast will be obtained. Question: Should they produce the clocks, and if so, how many?

3. 1-3 Expressing the Problem Mathematically Decision variable: –Q = Number of grandfather clocks to produce Costs: –Fixed Cost = $50,000 (if Q > 0) –Variable Cost = $400 Q –Total Cost = 0, if Q = 0 $50,000 + $400 Q, if Q > 0 Profit: –Profit = Total revenue – Total cost Profit = 0, if Q = 0 Profit = $900Q – ($50,000 + $400Q) = –$50,000 + $500Q, if Q > 0

4. 1-4 Special Products Co. Spreadsheet

5. 1-5 Analysis of the Problem

6. 1-6 Management Science Interactive Modules Sensitivity analysis can be performed using the Break-Even module in the Interactive Management Science Modules (available on your MS Courseware CD packaged with the text). –Here we see the impact of changing the fixed cost to $75,000.

7. 1-7 Special Products Co. Spreadsheet