Operations
Management
Supplement 7 –
Capacity Planning
PowerPoint presentation to accompany
Heizer/Render
Principles of Operations Management, 6e
Operations Management, 8e
© 2006
Prentice
Hall, Inc. Hall, Inc.
©
2006
Prentice
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
© 2006 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
© 2006 Prentice Hall, Inc.
S7 – 3
1
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
© 2006 Prentice Hall, Inc.
S7 – 4
Break-Even Analysis
–
Total revenue line
900 –
Cost in dollars
800 –
700 –
BreakBreak-even point
Total cost = Total revenue
P
r
do
rri
co
it
f
ro
Total cost line
600 –
500 –
Variable cost
400 –
300 –
200 –
100 –
Figure S7.5
ss r
Lo rido
r
co
Fixed cost
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|
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–
0 100 200 300 400 500 600 700 800 900 1000 1100
Volume (units per period)
© 2006 Prentice Hall, Inc.
S7 – 5
Break-Even Analysis
BEPx = BreakBreak-even point in
units
BEP$ = BreakBreak-even point in
dollars
P = Price per unit (after
all discounts)
x = Number of units
produced
= Total revenue = Px
= Fixed costs
= Variable costs
= Total costs = F + Vx
TR
F
V
TC
BreakBreak-even point
occurs when
TR = TC
or
Px = F + Vx
© 2006 Prentice Hall, Inc.
BEPx =
F
P-V
S7 – 6
2
Break-Even Analysis
BEPx = BreakBreak-even point in
units
BEP$ = BreakBreak-even point in
dollars
P = Price per unit (after
all discounts)
BEP$ = BEPx P
F
=
P
P-V
F
=
(P - V)/P
F
=
1 - V/P
x = Number of units
produced
= Total revenue = Px
= Fixed costs
= Variable costs
= Total costs = F + Vx
TR
F
V
TC
Profit = TR - TC
= Px - (F + Vx)
Vx)
= Px - F - Vx
= (P - V)x - F
© 2006 Prentice Hall, Inc.
S7 – 7
Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit
$1.50/unit
BEP$ =
Material = $.75/unit
$.75/unit
Selling price = $4.00 per unit
$10,000
F
=
1 - [(1.50 + .75)/(4.00)]
1 - (V/P)
V/P)
© 2006 Prentice Hall, Inc.
S7 – 8
Break-Even Example
Fixed costs = $10,000
Direct labor = $1.50/unit
$1.50/unit
BEP$ =
=
BEPx =
© 2006 Prentice Hall, Inc.
Material = $.75/unit
$.75/unit
Selling price = $4.00 per unit
$10,000
F
=
1 - [(1.50 + .75)/(4.00)]
1 - (V/P)
V/P)
$10,000
= $22,857.14
.4375
$10,000
F
=
= 5,714
4.00 - (1.50 + .75)
P-V
S7 – 9
3
Break-Even Example
50,000 –
Revenue
Dollars
40,000 –
BreakBreak-even
point
30,000 –
Total
costs
20,000 –
Fixed costs
10,000 –
|
–
0
© 2006 Prentice Hall, Inc.
|
|
2,000
4,000
|
6,000
Units
|
|
8,000
10,000
S7 – 10
4