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Operations

Management
Break-even Point
Analysis
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 7e
Operations Management, 9e
2008 Prentice Hall, Inc.

S7 1

Break-Even Analysis
Technique for evaluating process
and equipment alternatives
Objective is to find the point in
dollars and units at which cost
equals revenue
Requires estimation of fixed costs,
variable costs, and revenue

2008 Prentice Hall, Inc.

S7 2

Break-Even Analysis
Fixed costs are costs that continue
even if no units are produced
Depreciation, taxes, debt, mortgage
payments

Variable costs are costs that vary


with the volume of units produced
Labor, materials, portion of utilities
Contribution is the difference between
selling price and variable cost
2008 Prentice Hall, Inc.

S7 3

Break-Even Analysis
Assumptions
Costs and revenue are linear
functions
Generally not the case in the real
world

We actually know these costs


Very difficult to accomplish

There is no time value of money


2008 Prentice Hall, Inc.

S7 4

Break-Even Analysis

Total revenue line

900
800

Cost in dollars

700

Total cost line

500
400

Variable cost

300

100

2008 Prentice Hall, Inc.

co
t
i
of
r
P

600

200

Figure S7.6

Break-even point
Total cost = Total revenue

or
d
i
rr

ss or
o
L ri d
r
co
|

Fixed cost
|

100 200 300 400 500 600 700 800 900 1000 1100
Volume (units per period)
S7 5

Break-Even Analysis
BEPx =
breakeven point in units
BEP$ =
breakeven point in dollars
P
=
price
per unit (after all
discounts)

Break-even point
occurs when

TR = TC
or
Px = F + Vx
2008 Prentice Hall, Inc.

x=
number of
units produced
TR
=
total
revenue = Px
F=
fixed costs
V
=
variable cost per unit
TC
=
total
costs = F + Vx

F
BEPx =
P-V

S7 6

Break-Even Analysis
BEPx =
breakeven point in units
BEP$ =
breakeven point in dollars
P
=
price
per unit (after all
discounts)

BEP$ = BEPx P
=
=
=
2008 Prentice Hall, Inc.

F P
P-V
F
(P - V)/P
F
1 - V/P

x=
number of
units produced
TR
=
total
revenue = Px
F=
fixed costs
V
=
variable cost per unit
TC
=
total
costs = F + Vx

Profit = TR - TC
= Px - (F + Vx)
= Px - F - Vx
= (P - V)x - F
S7 7

Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit

Material = $.75/unit
Selling price = $4.00 per unit

$10,000
F
BEP$ =
=
1 - [(1.50 + .75)/(4.00)]
1 - (V/P)

2008 Prentice Hall, Inc.

S7 8

Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit

Material = $.75/unit
Selling price = $4.00 per unit

$10,000
F
BEP$ =
=
1 - [(1.50 + .75)/(4.00)]
1 - (V/P)
$10,000
=
= $22,857.14
.4375
$10,000
F
BEPx =
=
= 5,714
4.00 - (1.50 + .75)
P-V

2008 Prentice Hall, Inc.

S7 9

Break-Even Example
50,000

Revenue

40,000

Break-even
point

Dollars

30,000

Total
costs

20,000
10,000

Fixed costs

2008 Prentice Hall, Inc.

2,000

4,000

6,000
Units

8,000

10,000

S7 10

Break-Even Example
Multiproduct Case
BEP$ =

where

2008 Prentice Hall, Inc.

V
P
F
W
i

1-

Vi
Pi

x (Wi)

= variable cost per unit


= price per unit
= fixed costs
= percent each product is of total dollar sales
= each product

S7 11

Multiproduct Example
Fixed costs = $3,500 per month
Item
Sandwich
Soft drink
Baked potato
Tea
Salad bar

2008 Prentice Hall, Inc.

Price
$2.95
.80
1.55
.75
2.85

Cost
$1.25
.30
.47
.25
1.00

Annual Forecasted
Sales Units
7,000
7,000
5,000
5,000
3,000

S7 12

Multiproduct Example
Fixed costs = $3,500 per month
Annual Forecasted
Item
Price
Cost
Sales Units
Sandwich
$2.95
$1.25
7,000
Soft drink
.80
.30
7,000
Baked potato
1.55
.47 Annual 5,000 Weighted
Selling Variable .75
Forecasted 5,000
% of Contribution
Tea
.25
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $
Sales (col 5 x col 7)
Salad bar
2.85
1.00
3,000

Sandwich
Soft drink
Baked
potato
Tea
Salad bar

2008 Prentice Hall, Inc.

$2.95
.80
1.55

$1.25
.30
.47

.42
.38
.30

.58
.62
.70

$20,650
5,600
7,750

.446
.121
.167

.259
.075
.117

.75
2.85

.25
1.00

.33
.35

.67
.65

3,750
8,550
$46,300

.081
.185
1.000

.054
.120
.625
S7 13

BEP$ =

1-

Vi
Pi

x (Wi)

$3,500 x 12
= $67,200
.625

Daily = $67,200 = $215.38


sales 312 days
.446 x $215.38
$2.95

2008 Prentice Hall, Inc.

= 32.6 33 sandwiches
per day

S7 14