Lecture Operations and supply chain management: The Core (3/e) – Chapter 6a: Break-even analysis

After reading the material in this chapter, you should be able to: Demonstrate how production processes are organized, describe the product-process matrix, provide an overview of how the different types of production processes are designed, understand how to design and analyze an assembly line. | Break-Even Analysis Chapter 6a McGraw Hill Irwin Copyright 2013 by The McGraw Hill Companies Inc. All rights reserved. Trade-Offs The choice of specific equipment to use in production processes can be based upon an analysis of cost trade-offs Often the choice is between specialized and general equipment Specialized equipment may require a higher initial investment but can perform more efficiently over the long run General equipment often has a lower initial investment but lacks the efficiency of a specialized machine 6a 2 Break-Even Analysis One means of choosing between two options is a break-even analysis Understanding how profits and losses change for each option as the total number of units varies This is particularly suitable when processes have a significant initial investment fixed cost and when production costs vary in proportion to the number of units produced variable costs Excel Break-Even Calculations 6a 3 Example A manufacturer is considering three options for obtaining a machined part Buy the part from a supplier for 200 per unit no fixed cost Purchase Cost 200 x Demand Make the part on a semi-automatic lathe for 75 per unit fixed costs of 80 000 Purchase Cost 80 000 75 x Demand Make the part with a machining center for 15 per unit fixed costs of 200 000 Purchase Cost 200 000 15 x Demand 6a 4 Example Calculate Break- Even Points Break-even point A set total cost for option 2 equal to total cost for option 3 and solve for D Break-even point B set total cost for option 1 equal to total cost for option 2 and solve for D 6a 5 Example Chart the Alternatives Break-even point between machine center and buy option is not relevant Break-even point A. Machine center becomes efficent Break-even point B. Semiautomatic lathe becomes efficent 6a 6