Engineering Economy Lecture 8 (Sept 27)
Break-Even Analysis
Terms:
Break-Even
Fixed Cost – is always fixed regardless of the number of
parts produced per period
Variable Cost – is a function of the number of parts
produced. EX. if every part costs P2.00 to produce per
month, Var.Cost = 2N, where N is the number of parts
Solution Step:
(a) List all costs for 2 options
(b) Note for fixed costs and variable costs
(c) SUM all costs for each option
(d) Equate
Problems:
1. Two machines are being considered for the
production of a particular part for which there is a
long-term demand. Machine A costs P50,000 and is
expected to last 3 years and has a P10,000 salvage
value. Machine B costs P75,000 and is expected to
last 6 years and has a zero salvage value. Machine A
can produce a part in 18 seconds; Machine B requires
only 12 seconds per part. The out-of-pocket hourly
cost of operation is P38 for A and P30 for B.
Monthly maintenance costs are P200 for A and P220
for B.
If interest on invested capital is 25%, determine the
number of parts per year at which the machines are
equally economical. If the expected number of parts
per year is greater that this break-even quantity,
which machine would be favored?
2. Two electric motors are being considered to power an
industrial hoist. Each capable of providing 100 hp.
Pertinent data for each motor are as follows
Motor A Motor B
Investment P25,000 P32,000
Electrical Efficiency 84% 88%
Maintenance per year 400 600
Life, yrs 10 10
Money is worth 20%. If the expected usage of the
hoist is 700 hours per year, what would the cost of
electrical power have to be before Motor A is favored
over Motor B?
3. The cost of producing a small transistor radio set
consists of P23.00 for labor and P37.00 for materials.
The fixed charges in operating the plant are P100,000
per month. The variable cost is P1.00 per set. The
radio set can be sold for P75.00 each. Determine how
many sets must be produced per month to break even.
4. A company has a production capacity of 500 units
per month and its fixed costs are P250,000 a month.
The variable costs per unit are P1,150 and each unit
can be sold for P2,000. Economy measures are
instituted to reduce the fixed costs by 10% and the
variable costs by 20%. Determine the old and new
break even points. What are the old and new profit at
100% capacity?
5. A local factory assembling calculators produces 400
units per month and sells them at P1,800 each.
Dividends are 8% on the 8,000 shares with par value
of P250 each. The fixed operating cost per month is
P25,000. Other costs are P1,000 per unit. Determine
the break-even point. If only 200 units were produced
per month, determine the profit or loss.
6. A company manufacturing calculators has a capacity
of 200 units a month. The variable costs are P1,000
per unit. The average selling price of calculators is
P2,500. Fixed costs of the company amount to
P150,000 per month, which include all taxes. The
company pays an annual dividend of P12 per shareon
each of the 30,000 shares of common stocks.
(a) Determine the number of calculators that
must be sold each month to break-even and
the sales volume corresponding to the
unhealthy point.
(b) What is the profit or loss if 150 units were
produced and sold a month?
(“unhealthy point” is the sales volume at which
the business will be able to pay exactly the
desired rate of dividend)
7. Compute the number of blocks that an ice plant must
be able to sell per month to break-even based on the
following data:
Cost of electricity per block P 20
Tax to be paid per block P2
Real estate tax 3,500/mo
Salaries & wages 25,000/mo
Others 12,000/mo
Selling price of ice 55/block