Excercise Number 2.

17

A process has been designed to produce a new product P. Based on your design
calculations, the fixed capital investment of the process is estimated to be $500MM. The
useful life period of the process is taken to be 10 years. The salvage value of the process
is assumed to be 10 percent of the fixed capital investment. Other fixed charges for the
process (property taxes, insurance, salaries, and so on) are $30MM/yr. The maximum
production capacity of the process is 300,000tons/yr of product P. The operating cost of
the process is $250/ton. It is desired to break even at a production rate of 33.3 percent
of the maximum process capacity. What should be the selling price of the product?

Graphic Method

Total Fixed
Total Income Variable charges Product Cost Charges
($MM/yr) ($MM/yr) (TPC) ($MM/yr)
($MM/yr)
0 0 75 75
100 25 100 75
300 75 150 75

B rea k -E v en P o in t A n a ly sis
300

250

200
$MM/YEAR

150

Break-even point

100

50

0
0 50000 100000 150000 200000 250000

t/year
50

0
0 50000 100000 150000 200000 250000

t/year

FC TPC Variable Charges Total Income

n your design
be $500MM. The
ue of the process
d charges for the
r. The maximum
operating cost of
e of 33.3 percent
of the product?

Production Rate
(ton/yr)

0
100000
300000

ly sis

200000 250000 300000

200000 250000 300000

Total Income