Break-even analysis

Problem 1:
The General Store at State University is an auxiliary bookstore located near the dormitories that sells
academic supplies, toiletries, sweatshirts and T-shirts, magazines, packaged food items, and canned soft
drinks and fruit drinks. The manager of the store has noticed that several pizza delivery services near
campus make frequent deliveries. The manager is therefore considering selling pizza at the store. She
could buy premade frozen pizzas and heat them in an oven. The cost of the oven and freezer would be
$27,000. The frozen pizzas cost $3.75 each to buy from a distributor and to prepare (including labor and
a box). To be competitive with the local delivery services, the manager believes she should sell the pizzas
for $8.95 apiece. The manager needs to write up a proposal for the university’s director of auxiliary
services.
a. Determine how many pizzas would have to be sold to break even.
b. If the General Store sells 20 pizzas per day, how many days would it take to break even?
c. The manager of the store anticipates that once the local pizza delivery services start losing
business, they will react by cutting prices. If after a month (30 days) the manager has to lower
the price of a pizza to $7.95 to keep demand at 20 pizzas per day, as she expects, what will the
new break-even point be, and how long will it take the store to break even?
Problem 2:
Hannah Byers and Kathleen Taylor are considering the possibility of teaching swimming to kids during
the summer. A local swimming club opens its pool at noon each day, so it is available to rent during the
morning. The cost of renting the pool during the 10-week period for which Hannah and Kathleen would
need it is $1,700. The pool would also charge Hannah and Kathleen an admission, towel service, and life
guarding fee of $7 per pupil, and Hannah and Kathleen estimate an additional $5 cost per student to
hire several assistants. Hannah and Kathleen plan to charge $75 per student for the 10-week swimming
class.
a. How many pupils do Hannah and Kathleen need to enroll in their class to break even?
b. If Hannah and Kathleen want to make a profit of $5,000 for the summer, how many pupils do
they need to enroll?
c. Hannah and Kathleen estimate that they might not be able to enroll more than 60 pupils. If they
enroll this many pupils, how much would they need to charge per pupil to realize their profit
goal of $5,000?
Aggregate planning
Problem 3:
A manufacturer has the following information on its major products:
Regular time production capacity: 2600 units/period
Inventory costs: $2/unit/period

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Overtime production cost: $12 per unit
Backlog costs: $5/unit/period
Beginning inventory: 400 units
The demands for four periods are 4000, 3200, 2000 and 2800 respectively. Develop an aggregate plan
and evaluate its cost.
Problem 4:
A manufacturer has the following information on its major product:
Regular time product capacity = 2600 per period
Regular time production cost = $400/unit
Overtime cost = $600/unit
Inventory cost = $100/unit/period (based on ending inventory)
Backlog costs = $250/unit/period
Beginning inventory = 400 units
Demand for four periods = 4000, 3200, 2000 and 2800 respectively.
Develop a production plan that yields zero inventory at the end of period 4 and balances total
production in the period and minimizes total costs.
Problem 5*:
XYZ Ltd. is interested in an aggregate plan that determines the production quantities in the next six
months. The forecast for the six months in man-hours is given in the following table.
March April May June July August
15000 12000 18000 20000 25000 20000
Initial inventory is 8000 man-hours, and the expected final inventory is 10000 man-hours. Regular time
production hours available are 15000 man-hours and 6000 man-hours can be got through over time. The
RT production cost is $20 per hour and OT cost is $30 for the first day and $40 for the second day. It may
be assumed that the company works for five days a week and hence an additional 20% capacity can be
got through OT each day. The cost of changing workforce is given by d 2 - 2.5d where d is the change in
production level. Cost of inventory is $5 per unit per month while cost of shortage is $20 per unit per
month.
Formulate an aggregate plan that decides the production quantities and inventory levels for the
company. State clearly your choice of the model and the assumptions.
Disaggregation
Problem 6:

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Consider a disaggregation model for three items. The demands for every month are 600, 800, 1000 and
the beginning inventories are 200, 400 and 600 respectively. The LP was solved, and part of the solution
is tA = 0, tB = 0.2571. Find tC and T. Create the inventory table for this problem.
Problem 7:
Consider the data in problem 6. Provide a feasible solution to the LP with a higher T by distributing the
available inventory of 1200 differently.
Problem 8*:
Consider the data given in problem 6. You are given that the demands for months 2 and 3 for three
items are 500, 500, 600 and 400, 600, 700 respectively. Formulate a model for maximizing T using the
time-varying demand model.