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Break-even analysis

Operations Management Dr. Ron Lembke. 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.

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Break-even analysis

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  1. Operations Management Dr. Ron Lembke Break-even analysis

  2. 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

  3. If we only sell 1, which is cheapest? • If we sell a gazillion, which is cheapest? Break-Even Analysis

  4. Break-Even Outsource Total Costs Draw Lowest Fixed Cost Line Volume

  5. Break-Even Outsource Total Costs Machining Center Volume

  6. Break-Even Outsource Total Costs Lathe Machining Center Volume

  7. Break-Even Outsource Total Costs Lathe Machining Center Volume

  8. 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 Break-Even Analysis 100k 300k 200k C Total Costs A B Volume 0 1,000

  9. 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 Break-Even Analysis 300k 200k 100k 400k A Total Costs B C Volume 0 2,000

  10. 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 Break-Even Analysis 300k 200k 100k 400k 600k 500k A Total Costs B C Volume 0 3,000

  11. When does Lathe become cheaper than Outsourcing? • 80,000 + 75*x = 200*x • 80,000 = 125*x • x = 640 Break-Even Analysis

  12. Break-Even Analysis Machining Center Outsource Lathe 600k 100k 400k 300k 200k 500k A Total Costs B C 640 Volume 0 3,000

  13. 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

  14. Break-Even Analysis Machining Center Outsource Lathe 600k 100k 400k 300k 200k 500k A Total Costs B <= 640 Outsource 640-2000 Lathe >= 2000 Mach Ctr C 640 2,000 Volume 0 3,000

  15. 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

  16. 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 Break-Even Profit quantity

  17. 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? Summary

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