BA 341 13th Edition Lecture 13 Outline of Last Lecture I. Success StoryII. Exam 2 Review III. Chapter 7IV. Chapter 9V. Chapter 16Outline of Current Lecture VI. Break- Even AnalysisVII. Example #1VIII. Example #2IX. Multiproduct Case Example #1X. Multiproduct Case Example #2Current LectureBreak-Even Analysis- A method of choosing among alternative layouts and process choices that relies on an analysis of cost/volume trade-offs - Seeks to find the production volume required to make a profit on a certain process or piece of equipment- Facilitates the selection of production technology and processes, in line with corporate strategy- Revenue = CostBreak-Even Analysis: ExampleVolunteerCopy, a small custom printing shop, seeks to launch a new postcard collection to celebrate the Winter Holidays. To this end, VolunteerCopy has purchased a new digital postcard printer at a bargain price of $200. Assuming that the cost of labor, electricity and materials is $0.78 per postcard and that VolunteerCopy plans to sell the postcards for $1.20 apiece, find the number of postcards needed to break even.- Fixed Cost = $200These notes represent a detailed interpretation of the professor’s lecture. GradeBuddy is best used as a supplement to your own notes, not as a substitute.- Unit Variable Cost = $.78- Unit Sale Price = $1.20- All the costs incurred = Fixed Cost + Unit Variable Cost x Production Volume o = 200 + 0.78 V- All the Revenue = Unit Sales Price x Production Volume o = 1.2 V- Set All the costs incurred = All the Revenue o 200 + 0.78 V = 1.2 V- Solve V= 200 / (1.2-0.78) = 476.19  477- Thus, the production volume where total revenues equal total costs is:o Break-even Demand = Fixed Costs / (Unit Sale Price – Unit Variable Cost)- In dollars of sales, break-even point is defined as:o Break-even in dollars = Fixed Costs/(1-Unit Variable Cost/Unit Sale Price)Another ExampleSuppose a manufacturer has the following options for obtaining a part: - buy the part at $200 per unit (no fixed cost)- make the part on a semiautomatic lathe at $75 per unit; a lathe costs $80,000 Which technology should the manufacturer choose? Why?Let D be the demand:- Cost of option 1: 200D- Cost of option 2: 80,000+75D- Crossover point: 200D=80,000+75D => D=640o If demand is less than 640 go with option 1o If demand is greater than 640 go with option 2Multiproduct Case example:Problem 1: A small furniture manufacturer makes chairs and bar stools. The unit selling prices are $50 and $80 for chairs and bar stools, while the unit costs are $30 and $52, respectively. Given that the manufacturer incurs fixed costs of $10,800 and that the ratio of chairs to bar stools sold is 4:1, find the break-even point in units and in dollars.Let T be total sales (chairs and bars stools together) and R is the ratioThen the # of Bar Stools sold is -> 1/5 T Rb=1/5And the # of Chairs sold is -> 4/5 T Rc=4/5Set equal to each other:- Total cost iso 10,800 + 30 (4/5) T +52 (1/5) T - Total revenue iso 50 (4/5) T+80 (1/5) T # of chairs =500x(4/5)=400 # of bar stools =500x(1/5)=100BEP in $ = 400x50+100x80=28,000Equations for the Break-Even PointMultiproduct Case Example:Problem 2: Le Bistro, like many other restaurants, offers a variety of products and would like to know its break-even point in dollars. Le Bistro incurs monthly fixed costs of $3,000. In addition, the following information is available:daily BEPHow many sandwiches do you need to sell daily?- Daily BEP in dollars =246.02- % of Total sales (for sandwiches) =62.1%- Daily sales for sandwiches =246.02 * 0.621 = 152.78- # of sandwiches = 152.78/5=30.56 -> - Need to sell 31 sandwiches