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 McGraw­Hill/Irwin         Copyright © 2013 by The McGraw­Hill 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 6a­2 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 6a­3 Example 6A.1  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 6a­4 Example 6A.1- Calculate BreakEven Points Break-even point A – set total cost for option equal to total cost for option and solve for D Break-even point B – set total cost for option equal to total cost for option and solve for D 6a­5 Example 6A.1- 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 6a­6 ... 6A.1- 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... Break-even point A – set total cost for option equal to total cost for option and solve for D Break-even point B – set total cost for option equal to total cost for option and solve for D 6a­5... 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