1. Operations Management Dr. Ron Lembke

2.  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?

3.  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

4. 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?

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

6. Volume Total Costs Outsource Draw Lowest Fixed Cost Line

7. Volume Total Costs Outsource Machining Center

8. Volume Total Costs Outsource Lathe Machining Center

9. Volume Total Costs Outsource Lathe Machining Center

10. 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 Volume Total Costs 300k 200k 100k 1,000 A B C 0

11. 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 Volume Total Costs 300k 200k 100k 2,000 400k A B C 0

12. 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 Volume Total Costs 300k 200k 100k 3,000 400k 500k 600k A B C 0

13.  When does Lathe become cheaper than Outsourcing?  80,000 + 75*x = 200*x  80,000 = 125*x  x = 640

14. 640 Volume Total Costs 300k 200k 100k 3,000 400k 500k 600k A B C 0 OutsourceLathe Machining Center

15.  When does Machining Center become cheaper than Lathe?  80,000 + 75*x = 200,000 + 15*x  60*x = 120,000  x = 2,000

16. 6402,000 Volume Total Costs 300k 200k 100k 3,000 400k 500k 600k A B C 0 OutsourceLathe Machining Center <= 640Outsource 640-2000Lathe >= 2000Mach Ctr

17.  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?