Breakeven Analysis

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Operation Management
Break-even Analysis: Exercise 1
Prepared by: Jeffry Douglas William Nagun MBA@GSM-UPM

MBA Chronicles
Fountain of Knowledge

Page 2

OPERATION MANAGEMENT Break-even Analysis: Exercise 1
Question No.3 (page 66): Spartan Casting must implement a manufacturing process that reduces emitted into the atmosphere. Two processes have been identified that particulate reduction. The first process is expected to incur $350,000 of variable cost to each casting Spartan produces. The second process has adds $90 of variable cost per casting. a) b)

the amount of particulates provide the same level of fixed cost and add $50 of fixed cost of $150,000 and

What is the break-even quantity beyond which the first process is more attractive? What is the difference in total cost if the quantity produced is 10,000?

Table 1: FIXED COST (F) VARIABLE COST (cQ) Process A $350,000 $50 Process B $150,000 $90

Therefore from Table 1, we can identify that the Fixed Cost for Process A is Fa = $350,000; while Fixed Cost for Process B is Fb = $150,000. In addition, the Variable Cost for Process A is caQ =$50; while Variable Cost for Process B is cbQ =$90. At the Point of Indifference, the cost of Process A and Process B is assumed equal. The formula is; Fa + caQ = Fb + cbQ Then from the above formula we can find Q as the break-even quantity. Therefore the equation for break-even quantity is;

Q

=

Fa – Fb cb – ca
350,000 – 150,000 90 – 50

=

=

5000

From the above equation, we find that the break-even quantity is 5000 unit. Tabulation in Table 2.0 and Graph 1.0 also confirmed that the break-even quantity is at 5000 unit The different in total cost between Process A and Process B is illustrated is Table 2.0 Table 2.0 Process A Cost A Quantity 400000 1000 450000 2000 500000 3000 550000 4000 600000 5000 650000 6000 700000 7000 750000 8000 800000 9000 850000 10000 Process B Cost B Quantity 240000 1000 330000 2000 420000 3000 510000 4000 600000...
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