3

Supplement
C h a p t
e r
FINANCIAL ANALYSIS IN
OPERATIONS
MANAGEMENT
Supplement Outline
•Cost Definitions
•Activity-Based Costing
•Break-Even Analysis
•Obsolescence, Depreciation and
Taxes
•Types of Economic Decisions
•Financial Definitions
•Methods for Evaluating Investment

Supplement 3- Alternatives
1
Irwin/McGraw-Hill
Irwin/McGraw-Hill •Sample Problems
©
onMcGraw-Hill
© The
Investment
The McGraw-Hill Companies,
Companies,
 3
Supplement
C h a p t
e r
FINANCIAL ANALYSIS IN
OPERATIONS
MANAGEMENT Supplement
Objectives
•Introduce cost definitions and show how
they are
used in operations management.
•Demonstrate breakeven analysis in an
operations
management environment.
•Show how obsolescence, depreciation
and taxes
are used in operations management.
•Introduce the time value of money with
respect
to operations management decisions.

Supplement 3-
2
Irwin/McGraw-Hill
Irwin/McGraw-Hill ©
© The
The McGraw-Hill
McGraw-Hill Companies,
Companies,
 Types of Costs

• Fixed Costs
• Variable Costs
• Sunk Costs
• Opportunity Costs
• Avoidable Costs
• Out-of-Pocket Costs
• Cost of Capital

Supplement 3-
3
Irwin/McGraw-Hill © The McGraw-Hill Companies,
XHIBIT 3S.1 Fixed and Variable Costs

Total costs
Costs

Variable costs

Fixed costs

Volume (number of units)

Supplement 3-
4
Irwin/McGraw-Hill © The McGraw-Hill Companies,
Breakeven Analysis: Revenue versus
Costs
Revenues

Total costs
Costs

Breakeven point

V1
Volume (number of units)
Supplement 3-
5
Irwin/McGraw-Hill © The McGraw-Hill Companies,
 Breakeven Analysis: Choice of
Processes
Total costs - process A

Total costs - process B

Costs

Breakeven point

V1
Volume (number of units)
Supplement 3-
6
Irwin/McGraw-Hill © The McGraw-Hill Companies,
 Types of Economic Decisions
• Purchase of new equipment or
facilities
• Replacement of existing facilities
or equipment
• Make-or-buy decisions
• Lease-or-buy decisions
• Temporary shutdown or plant
abandonment decisions
• Addition or elimination of a product
or product line
Supplement 3-
7
Irwin/McGraw-Hill © The McGraw-Hill Companies,
 Financial Definitions
• Compound Value of a Single
Amount
• Compound Value of an
Annuity
• Present Value of a Future
Single Payment
• Present Value of an Annuity
• Discounted Cash Flow

Supplement 3-
8
Irwin/McGraw-Hill © The McGraw-Hill Companies,
 Methods for Evaluating
Investment Alternatives

• Net Present Value

• Payback Period
• Internal Rate of
Return

Supplement 3-
9
Irwin/McGraw-Hill © The McGraw-Hill Companies,