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Break Even Point Cost Analysis

# Break Even Point Cost Analysis

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This is a treatise concerning simple breakeven point cost analysis for equipment replacement.
A complete cost analysis can be a time consuming task and a waste of
personnel resources if initial assumptions are incorrect.
This is a treatise concerning simple breakeven point cost analysis for equipment replacement.
A complete cost analysis can be a time consuming task and a waste of
personnel resources if initial assumptions are incorrect.

Published by: William Greco on Apr 15, 2013

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William GrecoPage-1 of 62404 Greensward N.Warrington, Pa. 18976
W2gre@verizon.net
Date: April15,2013
Simple Breakeven Point MathematicsExecutive Summary
The following article presents the mathematics required to calculate asimple, breakeven point cost analysisfor equipment replacement.
Detailed vs Simple
This article does not includeSalvage Value, Depreciation, Loan Interest Rates,Present Worth, Bond Funding or Tax Break mathematics. This is a treatiseconcerning simple breakeven point cost analysis for equipment replacement.A complete cost analysis can be a time consuming task and a waste of personnel resourcesif initial assumptions are incorrect. A quick analysis should beundertaken prior to a detailed examination of equipmentreplacement ormodification. Some of the data required to conduct a successful cost analysisis knowing the price of the new equipment, yearly parts outlay, yearly maintenancelabor costs and the energy charges for the existing and new equipment. These expensescan be either assumed, averaged from past experience or obtained from vendorscriteria.
Combinations
The first thing that should be considered is how many options will be compared.Each competing option must be compared against every other alternative.If more than twodifferent options are availablethen an unordered arrangementthat consists of a subset of objects from a set without regard to order and whichrepetitions are not allowed with distinct combinations of r objects out of n is:
!! !
nn r
n
(equation-1)
n
or nalso written
n
c


William GrecoPage-2 of 62404 Greensward N.Warrington, Pa. 18976
W2gre@verizon.net
Date: April15,2013Combinations(Continued from page-1)
Example-1:
Assume that a total of (5) options are under consideration then:
 
! ! 5 4 3 2 1 120 12010! ! ! ! 5 2 ! 2 1 3 2 2 12
5
2
n nn r r n r
n
    
10 combinations will be required to be examined.Another method follows:Cancel all common factors =
5 4 3 2 1 5 43 2 15 2 ! 2 1
3 2 1
201022 1
Simple Breakeven Point
Example-2:
In this example breakeven points for (4) options are being investigated.Option-1 represents a complete equipment replacement, Option-2 portrays expenseswith no replacementof equipment, Option 3 denotes marginal modificationof someequipment and Option-4signifies partial equipment replacement with a higherinitial cost than Option-3.Table-1Option NumberEquipmentReplacementYearly Parts ExpenseYearly MaintenanceLabor ExpenseYearly Energy Cost1\$95,000\$500\$1,000\$3,50020\$6,500\$9,000\$12,0003\$15,000\$3,000\$4,500\$7,8004\$22,500\$2,100\$3,800\$6,200Number of option combinationsto be compared:
4 3 2 1 4 3 2 14 2 ! 2 1
2 2 1
126 combinations2

William GrecoPage-3 of 62404 Greensward N.Warrington, Pa. 18976
W2gre@verizon.net
Date: April 15,2013
Simple Breakeven Point MathematicsSimple Breakeven Point(continued from page-2)
Example-2:(Continued from page-2)
Comparing option-1 against option-2:X represents the number of years that abreakeven point is reached.The two equations are set equaltoone another anda solution is found for X.
95,000 500 1,000 3,500 0 6,500 9,000 12,000
X X X X X
Combining like terms:
5,000 95,000 27,500
X
Subtracting 27,500X from both sides:
5,000 27,500 95,000 27,500
X X
27,500
X
5,000 27,500 95,000 0
X
22,500 95,000 0
X
Subtract 95,000 from both sides:
22,500 95,000 95,000
X
0
95,00022,500 95,000
X
 
Divide each term by -22,500:
22,500
22,500
95,000
22,50095,000 384.2222,500 9
X YEARS
Afterthe 4.22 years in comparison with option-2, option-1 will be saving6,500 + 9,000 + 12,000
–5,000 = \$22,500 per year

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