Cost-Volume Tradeoffs Operations Management Dr. Ron Lembke Cost-Volume Tradeoffs

Break-Even Profit quantity 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?

Break-Even Profit quantity 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

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

Cost-Volume tradeoff If we only sell 1, which is cheapest? If we sell a gazillion, which is cheapest?

Cost-Volume tradeoff Outsource Total Costs Draw Lowest Fixed Cost Line

Cost-Volume tradeoff Outsource Total Costs Machining Center Volume

Cost-Volume tradeoff Outsource Total Costs Lathe Machining Center

Cost-volume Tradeoff Outsource Total Costs Lathe Machining Center

Cost-volume Tradeoff Cost of 1,000 units A: 200 * 1,000 = 200,000 B: 80,000 + 75*1,000 = 155,000 C: 200,000 + 15*1,000 = 215,000 300k 200k 100k C Total Costs A B Volume 1,000

Cost-volume Tradeoff Cost of 2,000 units A: 200 * 2,000 = 400,000 B: 80,000 + 75*2,000 = 230,000 C: 200,000 + 15*2,000 = 230,000 400k A Total Costs 300k B C 200k 100k 2,000 Volume

Cost-volume Tradeoff Cost of 3,000 units A: 200 * 3,000 = 600,000 B: 80,000 + 75*3,000 = 305,000 C: 200,000 + 15*3,000 = 245,000 A 600k 500k Total Costs 400k B 300k C 200k 100k Volume 3,000

Cost-volume Tradeoff When does Lathe become cheaper than Outsourcing? 80,000 + 75*x = 200*x 80,000 = 125*x x = 640

Cost-volume Tradeoff Volume Total Costs A B C Machining Center 300k 200k 100k 3,000 400k 500k 600k A B C Machining Center Outsource Lathe 640

Cost-volume Tradeoff When does Machining Center become cheaper than Lathe? 80,000 + 75*x = 200,000 + 15*x 60*x = 120,000 x = 2,000

Cost-volume Tradeoff Volume Total Costs A B C Machining Center 300k 200k 100k 3,000 400k 500k 600k A B C Machining Center Outsource Lathe <= 640 Outsource 640-2000 Lathe >= 2000 Mach Ctr 640 2,000

Summary Cost-Volume Tradeoff calculations Break-even profit quantity 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?