BA 341 13th Edition Lecture 13 Outline of Last Lecture I Success Story II Exam 2 Review III Chapter 7 IV Chapter 9 V Chapter 16 Outline of Current Lecture VI Break Even Analysis VII Example 1 VIII Example 2 IX Multiproduct Case Example 1 X Multiproduct Case Example 2 Current Lecture Break 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 Cost Break Even Analysis Example VolunteerCopy 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 200 These 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 Example Suppose 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 640 o If demand is less than 640 go with option 1 o If demand is greater than 640 go with option 2 Multiproduct 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 ratio Then the of Bar Stools sold is 1 5 T Rb 1 5 And the of Chairs sold is 4 5 T Set equal to each other Total cost is o 10 800 30 4 5 T 52 1 5 T Total revenue is o 50 4 5 T 80 1 5 T Rc 4 5 of chairs 500x 4 5 400 of bar stools 500x 1 5 100 BEP in 400x50 100x80 28 000 Equations for the Break Even Point Multiproduct 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 BEP How 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 daily
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