OPERATIONS

MANAGEMENT
TOPIC V PART 2
 EVALUATING
ALTERNATIVES
 EVALUATING ALTERNATIVES
• An organization needs to examine alternatives for future
capacity from a number of different perspective.
– Will an alternative be economically feasible?
– How much will it cost?
– What will its useful life be?
• A number of techniques are useful for evaluating capacity
alternatives from an economic stand point.
• Some of the more common are cost-volume analysis, financial
analysis, decision theory and waiting-line analysis.
COST VOLUME ANALYSIS

• FOCUS: The relationships between costs, revenue and

volume of output.
• PURPOSE: Estimate the income of an organization under
different operating conditions.
• USEFUL: Tool for comparing capacity alternatives.
 COST VOLUME ANALYSIS
• Symbols
FC = Fixed Cost
VC = Variable Cost
v = Variable cost per unit
TC = Total Cost
TR = Total revenue
R = Revenue
Q = Quantity/ Volume of output
QBEP = Break-even quantity
P = Profit
COST VOLUME ANALYSIS

• FIXED COST: tend to remain constant regardless of

volume of output.
• VARIABLE COST: Vary directly with volume of output.
• TOTAL REVENUE: Have a linear relationship to output.
• BREAK-EVEN POINT: The volume at which total cost
and total revenue are equal.