Types of Cost
Costs
Fixed
Costs
Variable Costs
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Ch 5(B) : Capacity Planning: Break-Even Analysis
Operation costs are divided into 2 main groups:
• Fixed costs
• Variable costs
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Fixed Costs
Include rent, property tax, property insurance, wages
of permanent employees, depreciation (except in
working hour depreciation).
The total fixed cost is fixed throughout the year.
It does not depend on the production level.
When we have a plant, then the above costs are
fixed, no matter if we produce one unit or one million
units.
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Total Fixed Cost and Fixed Cost per Unit of Product
Total fixed cost
(F)
Fixed cost per unit of product
Production volume (Q)
Production volume (Q)
(F/Q)
4
Variable Costs
Costs of raw material, packaging material, direct
labor, production W&P are the main variable costs.
Variable cost is fixed per unit of production.
The total variable costs depend on the volume of
production.
The higher the production level, the higher the total
variable costs.
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Variable Cost per Unit and Total Variable Costs
Variable costs
Per unit of product
(V)
Total Variable costs
(VQ)
Production volume (Q)
Production volume (Q)
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Amount ($)
Total Costs
Total Fixed cost (F)
0
Q (volume in units)
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Total Revenue
It is assumed that the price of the product is fixed,
and we sell whatever we produce.
Total sales revenue depends on the production level.
The higher the production, the higher the total sales
revenue.
Price per unit
(P)
Production (and sales) (Q)
Total revenue
(TR)
Production (and sales ) (Q)
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Break-Even Analysis
Break-even point is the unit or dollar sales at which an
organization neither makes a profit nor a loss.
At the organization’s break-even sales volume:
Total Revenue = Total Cost
Amount ($)
Break-Even Point
0
BEP units
Q (volume in units)
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Break-Even Computations
TC=TR
TC=F+VQ
TR=PQ
F+VQ=PQ
QBEP = F/ (P-V)
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Breakeven (BEP)
Q BEP =
So:
FC . Times P
P – VC
PQbe = FC
xP
P - VC
PQbe = FC
xP
P/P – VC/P
PQbe = FC
atau
FC
1 – VC/P
1 – VC/S
BEP (Rp/US$) =
FC
atau
1 – VC/P
FC
1 – VC/S
Example
$500,000 total yearly fixed costs.
$150 per unit variable costs
$200 per unit sale price
QBEP=500,000/(200-150) =10,000 units
If our market research indicates that the
present demand is > 10,000, then this
manufacturing system is economically
feasible.
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Example
Sell
(400unit)
Variable Cost (VC)
Contribution Margin
Fixed Cost (FC)
Net Profit
Q BEP =
FC =
P – VC
Total
$ 1.000.000
600.000
$ 400.000
350.000
$
50.000
350.000 = 350
2500 - 1500
a Unit
$ 2.500
1.500
$ 1.000
BEP (Rp/US$) =
BEP =
FC
.
1 – VC/P
FC
=
350.000
= 350.000
1 – VC/P 1 – 1500/2500 1 - 0,6
= 350.000 = Rp 875.000
0,4
BEP unit = 875.000 / 2500
= 350 unit
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Atlanta Braves
(in thousands)
$7,000
$6,000
$5,000
$4,000
$3,000 Break even in units = 1,200,000 Revenues
Total Expense
$2,000even in $ = 1,200,000 x 24 = $28,800,000
Break
$1,000
$50
100 150 200 250
(in thousands)
Fixed expense
Break even poi
BEA for Multiple Alternatives
Break-even analysis for multiple alternatives:
Such an analysis is implemented to compare cases such as
 A Simple technology
 An Intermediate technology
 An Advanced technology
 General purpose machines
 Multi-purpose machines
 Special purpose machines
 Low F high V
 In between
 High F Low V
In general, when we move from a simple technology to an
advanced technology; F  V
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