Upon completion of this chapter you should understand: Calculating linear breakeven points; calculating nonlinear breakeven points; effect of changes in costs and revenue; strategies associated with capacity limits, expansion and profits; isocosts and breakeven between products;...
Trang 1Chapter 8 – Unit 1
Breakeven Analysis
IET 350 Engineering Economics
Trang 5to the limit of capacity.
Q
unitcostQ FC unitprice
Q
VC FC TR
TCTR
BE
BE BE
⎟
=
×+
Trang 9 Another category of costs are partially fixed and partially
variable. These are also known as semi‐fixed and semi‐variable
Partially fixed costs may be linear over an output range, then
incrementally increase to another linear level. Example →y p
another supervisor (fixed cost) is hired due to the increase in
production volume
Partially variable costs may be linear over an output range,
then the cost/unit may change resulting is a change in slope of
the line. Example → direct material cost per unit decreases due
to volume purchase discounts.
25
Non‐Linear Breakeven
Partially fixed cost is illustrated on the following graph
Note that the horizontal line incrementally shifts when
additional fixed cost is added
While profit occurs at
While profit occurs at
quantities greater than
breakeven, the level of
profit changes when
the fixed cost changes If the incremental
change in fixed cost had
been greater, the profit
Example Problem 8.2
27
Example Problem 8.2 Solution
Trang 13How Changes Effect Q BE
Decreasing the selling price will cause the breakeven to increase
since the total revenue (TR) line’s slope decreases.
37
Figure 8‐7 Changes in Costs and Selling Price Affect the Breakeven Point
(Bowman text page 308)
Area Graphs
Area graphs display breakeven information in a different format
to provide another view of breakeven, profit and capacity
An area graph is plotted for a specific output level and shows:
Variable cost
Variable cost
Fixed cost
Profit
Maximum capacity
Unused capacity
38
Area Graphs
Potential capacity is illustrated by the unused capacity falling
between current output and maximum capacity
If output is increased to utilize unused capacity, only variable
costs will increase
Additional output utilizing
the unused capacity results
in a higher profit/unit since
the fixed costs do not
increase Therefore, a firm can sell
product at a discount since
Trang 17TC A > TC B
Trang 18( ) (B )A
B A IC
B IC
B A IC
A
B B A A
B A
unitcost unitcost
FC FC Q
unitcostQ FC unitcostQ
FC
VC FC VC FC
TCTC
−
−
=
×+
Trang 19 Quantities other than the isocost point quantity indicate the
best alternative based on lowest total cost. For figure 8‐20
Output quantity < QICunits/year Ö select buy option
Output quantity > Qp q y QICICunits/year Ö select make option./y p
Trang 21Student Study Guide Ö Chapter 8
Homework Assignment Ö Problem Set 8
61