Transcript A Compressed Air System

MER 439 - Design of Thermal Fluid
Systems
BreakEven Analysis
Professor Anderson
Spring 2012
1
Breakeven Analysis
Break even analysis is used to
determine the volume of products
that must be produced to maximize
profitability.
Also called Cost-Volume-Profit
(CVP) analysis.
2
Breakeven Analysis
Fixed Costs - (FC) These are the costs
that don’t vary with output.
Examples: rent, depreciation,
advertising, building maintenance, etc.
Variable Costs - (VC) These are the
costs that do vary with output.
Examples: direct and indirect labor costs,
direct and indirect material costs.
3
Breakeven Analysis
Total Cost: TC = VC + FC
Total Revenue (TR) is the unit selling
price multiplied by the quantity sold.
TR= P*Q
P = Price, Q = Quantity Sold
Linear Model - assume TR, VC and FC
are linear. To sell more units, the selling
price must be reduced.
4
Breakeven Analysis
Demand Curve - Shows the relationship
between the quantity of unit sold and the
selling price.
Q = (b- P)/m
or
P = b - mQ
Selling Price per Unit, ($)
Generally:
$1,200
$1,000
Demand Curve
$800
$600
$400
Total Revenue
Area
$200
$0
0
100
200
300
400
500
600
Quantity Sold per Year
5
Breakeven Analysis
Real Demand Curves:
6
Breakeven Analysis
Breakeven Point - the point of
intersection between the TR and TC
curves.
7
Breakeven Analysis Example
A company produces an electronic timing
switch that is used in consumer and
commercial products made by several
other manufacturing firms. The fixed cost
is $73,000 per month and the variable
cost is $83 per unit. The selling price per
unit is P = $180-0.02Q (where Q =
Quantity Sold).
Make a TR plot and determine:
(a) Volumes at which breakeven
occurs. (range of profitable demand).
(b) The optimal volume for this product
8
Breakeven Analysis Example
Cost and Revenue in k$
$500
TC
FC
$400
TR
VC
$300
$200
$100
$0
0
1000
2000
3000
4000
5000
Quantity Sold per Month
9
Breakeven Analysis Example
Profit (or Loss) = TR - TC
= (180-0.02Q)Q-(73000+83Q)
= 97Q - 0.02Q2-73000
Set Profit = 0 to find bounds:
Q1 = 932 and Q2 = 3912 units per month
Set d(Profit)/dQ = 0 to find max:
Qmax = 2425 units per month
10
Project 4 - Economic Analysis
Perform a break-even analysis to determine
the number of units that must be sold per
year. The marketing department has provided
some information about the expected product
demand versus price:
Price
$1
$2
$3
$4
$5
$6
$7
$8
$9
$10
Sell Quant.
(in 1000)
100
90
80
70
60
50
40
30
20
10
.
11
Project 4 - Economic Analysis
The fixed costs (FC) for this project are expected to be
$100,000 per year.
Estimate your design cost:

Estimate your raw costs (E).

Estimate material cost as 25 cents per cubic inch.
(injection molding)

The boiler cost will be 50 cents.

Include estimates of any other materials you use.

Multiply your raw costs by 200% to account for labor
and overhead to get a variable cost per unit VC =
E(2.0)
12
Project 4 - Economic Analysis



Prepare a total cost and revenue break-even graph
and determine your break even pricing and sales
requirements.
Next determine the product price that will maximize
profit.
Assuming these sales estimates and prices are
good for at least 10 years, estimate the amount of
money that we can afford to put into initial R&D
costs if we want to realize a 12% rate of return on
the project. Prepare a plot of initial R&D budget
versus product price for a 12% rate of return.
13
Project 4 - Economic Analysis
We may have an opportunity to take advantage of
low labor costs in Elbonia. Child labor laws and
environmental compliance issues are non-existent in
Elbonia. If we go to Elbobnia, our fixed and raw costs
will be half what is quoted above. The labor and
overhead cost in Elbonia is also significantly less
expensive (VC = E*1.1). Should we pursue this
opportunity?
14