Operations

Management
Process Design
Chapter 7
7-1
Break-Even Analysis

7-2
 Break-Even Analysis
A means of finding the point in unites (Break even
volume), at which costs equal revenues

Total cost= fixed costs (exist even if no units

are produced) + total variable costs (vary
with the volume of units produced )

TC= cf + vcv
Total revenue = volume x price
TR = vp
7-3
 Process Selection with
Break-Even Analysis

Total cost = fixed cost + total variable cost

TC = cf + vcv
Total revenue = volume x price
TR = vp
Profit = total revenue - total cost
Z = TR - TC
= vp - (cf + vcv)
cf = fixed cost
v = volume (i.e., number of units produced and
sold)
cv = variable cost per unit
p = price per unit 7-4
 Solving for
Break-Even Volume
TR = TC
vp = cf + vcv
vp - vcv = cf
v(p - cv) = cf
cf
v= p-c
v

7-5
 Problem 1
 Carl, Inc., wants to determine the minimum unit
volume needed at its new facility to break even.
The firm first determines that it has fixed costs of
2000$ this period. Direct labor is 3$ per unit and
material is 2$ per unit. The selling price is 10$ per
unit.
Question : Determine the volume necessary for the
new facility to cover the total cost (Break even
volume)

PowerPoint presentation to accompany Heizer/Render – © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Principles of Operations Management, 5e, and Operations 7-6
Management, 7e
 Break-Even-Problem 1
Solution
Fixed cost = cf = $2,000
Variable cost = cv = $5 per unit
Price = p = $10 per unit

The break-even point is

cf 2000
v= p-c = = 400 units
v 10 - 5
Units

7-7
$3,000 —

$2,000 —

$1,000 —

7-8
 Break-Even Analysis

$3,000 —

$2,000 —

$1,000 —
Total
revenue
line
Units

7-9
 Break-Even Analysis

$3,000 — Total
cost
line

$2,000 —

$1,000 —
Total
revenue
line
Units

7-10
 Break-Even Analysis

$3,000 — Total
cost
line

$ 2,000—

$1,000 —
Total
revenue
line
400 Units
Break Even
point
7-11
 Point of Indifference
(Crossover point )
Point of Indifference is a volume where:
Total Cost of process A = Total cost of process B
✓ Rule for choosing process:
✓ Above point of indifference
choose process with
lowest variable cost
✓ Below point of indifference
choose process with
lowest fixed cost

7-12
 Point of Indifference-Problem 2
 The operations manager of Kenza.Inc. must select the least costly
process among 2 processes, A and B. Essentially, the manager needs
to determine the production volume (i.e., number of units) at which
Process A should be selected, and alternatively the volume at
which process B should be selected. The cost criteria is actually the
Total Cost, which includes fixed and variable costs. The following table
summarizes these costs for each process.
Process A Process B

Fixed Cost 2000 $ 10000 $

Variable Cost 5$ 2$

PowerPoint presentation to accompany Heizer/Render – © 2004 by Prentice Hall, Inc., Upper Saddle River, N.J. 07458
Principles of Operations Management, 5e, and Operations 7-13
Management, 7e
Point of Indifference: Problem 2
Solution
Process A Process B
$2,000 + $5v = $10,000 + $2v
$3v = $8,000
v = 2,667 units

7-14
Point of Indifference: Problem 2
Solution
Process A Process B
$2,000 + $5v = $10,000 + $2v
$3v = $8,000
v = 2,667 units

Below 2,667, choose A

Above 2,667, choose B

7-15
Choosing Between Two Processes

$20,000 —

$15,000 —

$10,000 —

$5,000 —

| | | |
1000 2000 3000 4000 Units

7-16
Choosing Between Two Processes

$20,000 — Total cost of

process A

$15,000 —

$10,000 —

$5,000 —

| | | |
1000 2000 3000 4000 Units

7-17
 Choosing Between Two
Processes
$20,000 — Total cost of
process A

Total cost of
$15,000 — process B

$10,000 —

Choose
process A
$5,000 —

| | | |
1000 2000 3000 4000 Units

7-18
Choosing Between Two Processes

$20,000 — Total cost of

process A

Total cost of
$15,000 — process B

$10,000 —

$5,000 —

| | | |
1000 2000 3000 4000 Units

7-19
 Choosing Between Two
Processes
$20,000 — Total cost of
process A

Total cost of
$15,000 — process B

$10,000 —

Choose Choose
process A process
$5,000 —
B
| | | |
1000 2000 3000 4000 Units

7-20
 Choosing Between Two
Processes
$20,000 — Total cost of
process A

Total cost of
$15,000 — process B

$10,000 —

Choose Choose
process A process
$5,000 — B
| | | |
1000 2000 3000 4000 Units
Point of indifference = 2,667 Units

7-21
 Point of Indifference: Problem 3
The Halli-Johnson company must select the least costly
process for its new product, the XT57G, from two different
alternatives. The following cost data were gathered:
Process MW Process UTR
Fixed cost $ 20,000 $ 50,000
Variable cost per unit $4 $2

1.Determine the point of indifference.

2. If the production volume is 18,500, then which process should be
selected?
 Point of Indifference: Problem 3
Solution

1. TC (A)=TC(B)-→20000+4v =5000+ 2v→ v= 15 000

2. 18 500 > 15000 -→ Above the point of indifference
Choose the process with the lowest variable →Process
UTR should be selected

7-23