Operations Management Dr. Ron Lembke

 How much do sales have to grow to make an investment pay off?  Fixed costs = $10,000  Direct labor = $1.50 / unit  Material = $0.75 / unit  Sales price = $4.00  How many units must sell to break even?

 Gross Profit per unit = $4 – ($1.5 + $0.75) = $1.75  How many units to sell to offset Fixed cost?  $10,000 = $1.75 * x  X = 10,000/1.75 = 5,714.3 = 5,715 units

Given a fixed cost, how many do we have to make to break even?  A: buy $200  B: Make on lathe: $80,000 + $75 each  C: CNC Machining Center:  $200,000 + $15 each Which is the cheapest way?

 If we only sell 1, which is cheapest?  If we sell a gazillion, which is cheapest?

Volume Total Costs Outsource Draw Lowest Fixed Cost Line

Volume Total Costs Outsource Machining Center

Volume Total Costs Outsource Lathe Machining Center

Volume Total Costs Outsource Lathe Machining Center

Cost of 1,000 units A: 200 * 1,000 = 200,000 B: 80, *1,000 = 155,000 C: 200, *1,000 = 215,000 Volume Total Costs 300k 200k 100k 1,000 A B C 0

Cost of 2,000 units A: 200 * 2,000 = 400,000 B: 80, *2,000 = 230,000 C: 200, *2,000 = 230,000 Volume Total Costs 300k 200k 100k 2, k A B C 0

Cost of 3,000 units A: 200 * 3,000 = 600,000 B: 80, *3,000 = 305,000 C: 200, *3,000 = 245,000 Volume Total Costs 300k 200k 100k 3, k 500k 600k A B C 0

 When does Lathe become cheaper than Outsourcing?  80, *x = 200*x  80,000 = 125*x  x = 640

640 Volume Total Costs 300k 200k 100k 3, k 500k 600k A B C 0 OutsourceLathe Machining Center

 When does Machining Center become cheaper than Lathe?  80, *x = 200, *x  60*x = 120,000  x = 2,000

6402,000 Volume Total Costs 300k 200k 100k 3, k 500k 600k A B C 0 OutsourceLathe Machining Center <= 640Outsource Lathe >= 2000Mach Ctr

 Cost-Volume Tradeoff calculations  Cheapest for one unit, and a gazillion  Accurate drawing  Find break-points algebraically  Break-even profit quantity  fixed cost to develop a product, how many must sell to be profitable?