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Operation costs are divided into 2 main groups: Fixed costs Variable costs
Fixed Costs
Include rent, property tax, property insurance, wages of permanent employees, depreciation (except in working hour depreciation). The total fixed cost is fixed throughout the year. It does not depend on the production level. When we have a plant, then the above costs are fixed, no matter if we produce one unit or one million units.
Variable Costs
Costs of raw material, packaging material, direct labor, production W&P are the main variable costs. Variable cost is fixed per unit of production. The total variable costs depend on the volume of production. The higher the production level, the higher the total variable costs.
Total Costs
Amount ($)
VQ F+ =
Q (volume in units)
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Total Revenue
It is assumed that the price of the product is fixed, and we sell whatever we produce. Total sales revenue depends on the production level. The higher the production, the higher the total sales revenue.
Break-Even Point
Amount ($)
ue t en v ofi Pr re al t os ot T al c t To
s os L
Break-Even Computations
TC=TR
TC=F+VQ
Example $500,000 total yearly fixed costs. $150 per unit variable costs $200 per unit sale price QBEP=500,000/(200-150) =10,000 units If our market research indicates that the present demand is > 10,000, then this manufacturing system is economically feasible.
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CIM
CNCs
Universal
Q1
Q2
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Tell me what to do: In terms of the range of demand and the preferred choice
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1 Q1
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F1=10000 F2=60000
V1=10 V2=5
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Q2
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F2=60000 V2=5 F3=150000 V3=2 Break-even of 2 and 3 F2+ V2 Q = F3+ V3 Q 60000 + 5Q = 150000+2Q
150000 60000 = 30000 Q= 52
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Assignment 3: Problem 1
A firm plans to begin production of a new small appliance. Management should decide whether to make the small engine for this product in-plant, or buy it from an outside source. If management decides to make the engine, then there are 2 alternatives: (1) Built it with a simple manufacturing system Fixed Cost: $10,000/year Variable Cost: $8 per unit (2) Built it with an advanced manufacturing system. Fixed Cost: $30,000/year Variable Cost: $5 per unit The purchase price of the engine is $10 per unit.
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?
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Assignment 3: Problem 2
A manager has the option of purchasing 1, 2 or 3 machines. The capacity of each machine is 300 units. Fixed costs are as follows: Number of Machines 1 2 3 Fixed cost $9,600 $15,000 $20,000 Total Capacity 1-300 301-600 601-900
Variable cost is $10 per unit, and the sales price of product is $40 per unit. Tell management what to do!
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Assignment 3: Problem 3
You are the production manager and are given the option to purchase either 1, 2 or 3 machines. Each machine has a capacity of 500 units. Fixed costs are as follows: Number of Machines 1 2 3 Fixed cost $19,200 $30,000 $40,000 Total Capacity 1- 500 501-1000 1001-1500
Variable cost is $35 per unit, and the sales price of product is $69 per unit. Determine the best option!
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