Breakeven Analysis

1
Breakeven Analysis

• PS Homework 6 and 7
• Due Feb. 13, 2003

2
In-class TEAM Assignment

• The machinist who was hired at 20.00 per hour
  makes parts which are normally distributed in
  size with a standard deviation of .001 inches.
• If your part requires an RC8 tolerance on a
  diameter 1 hole and requires one hour to
  manufacture, what is the effective cost of a
  part?
• Draw a break-even graph for this case.
• Use the basic data shown on the next slide.

3
Basic Data

• Startup Costs are 125,000
• Shipping is 10.00 per part
• Materials 5.00 per part, fully recoverable for a
  bad part
• Sales price is 60.00 per part
• Inventory on hand required to be 250 units

4
Solution

• Find the actual limits on the size of the hole.
  For an RC8 diameter 1.0 hole the limits are
  1.0000 to 1.0035.
• Assume a theoretical size in the middle of that
  range, thus a size of 1.00175 would be the
  expected average size.
• Calculate the rejection fraction using the
  standard deviation given.

5
Solution (cont.)

• Find the z value associated with the limits on
  the hole.
• Z (1.0035-1.00175)/0.001 1.75
• Z- (1.0000-1.00175)/0.001 -1.75
• From the z table find the percentage rejection
  for a z of 1.75
• Acceptable fraction is 2(0.4599) 0.9198
• Rejection is therefore 0.0802

6
Solution (cont.)

• Find the number which must be manufactured to
  yield 1 sellable values
• X 0.9198 1 ? X1.0872
• Total cost is therefore
• (assuming material from rejected parts is
  completely recyclable)
• ShippingMaterialsLabor
• 10.001.000 5.001.000 20.001.0872
  36.74 (per valve)

7
Solution (cont.)

• Cost 36.74NAP 125,000
• Income 60NAP - 15,000
• Break-even
• Cost Income
• NAP 6,019 (number of acceptable parts PRODUCED)
• NAS 6019 250 5,769 (number of acceptable
  parts that must be SOLD)

8
Alternate Solution Solve in terms of NAS

• Cost 36.74NAS 125,000 250(36.74)
• Income 60NAS
• Break-even
• Cost Income
• NAS 5,769 (number of acceptable parts SOLD)
• NAP 5,769 250 6,019 (number of acceptable
  parts that must be PRODUCED)
• SAME AS BEFORE!!!!

9
Further Refinements

• Inventory are never shipped so that the cost of
  shipping for these items should not be included
  in the analysis.
• On the previous slide, the effective cost of the
  inventory parts is 36.74 - 10.00 26.74.
• See refined solution on next slide.

10
Refined Solution

• Cost 36.74NAS 125,000 250(26.74)
• Income 60NAS
• Break-even
• Cost Income
• NAS 5,662 (number of acceptable parts SOLD)
• NAP 5,662 250 5,912 (number of acceptable
  parts that must be PRODUCED)
• Could also work in terms of NAP (next slide).

11
Refined Solution

• Cost 36.74NAP 125,000 - 250(10.00)
• Income 60NAP 15,000
• Break-even
• Cost Income
• NAP 5,912 (number of acceptable parts PRODUCED)
• NAS 5,912 - 250 5,662 (number of acceptable
  parts that must be SOLD)
• SAME AS BEFORE!!!

12
Updated Graph
13
Assignment 6Due02/13/2003 Team Assignment

• Evaluate the following situations and write a
  memo to your supervisor (Ms. Jamison) with your
  recommendations and reasons.
• Clearly state which options you would recommend
  the company to use and why.
• Include the effective cost of all six options.
• Work problem in terms of parts SOLD.

14
Assignment 6 (cont.)

• Rather than hiring a machinist, you could hire a
  Master Machinist at 30.00 per hour (i.e. Widget)
  her standard deviation is only .0005 inches
• You could hire an apprentice for only 12.50 an
  hour with a standard deviation of .003 inches
• By spending an additional 50,000 you can
  purchase better equipment which will reduce all
  standard deviations by 25.

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Assignment 6 (cont.)
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Assignment 7Due Individual Assignment

• Prepare 1 page (12pt. Font, 1.5 line spacing )
  for EACH industry presentation you attended on
  February 6th.
• (See web page for exact time and location for
  each company)