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Break-Even Analysis

• A standard approach to choosing among


alternative processes or equipment
• Model seeks to determine the point in units
produced (and sold) where we will start making
profit on the process or equipment
• Model seeks to determine the point in units
produced (and sold) where total revenue and
total cost are equal
Break-Even Analysis (Continued)
Break-even
Break-evenDemand=
Demand=

Purchase
Purchasecost
costof
ofprocess
processororequipment
equipment
Price
Priceper
perunit
unit --Cost
Costper
perunit
unit
or
or
Total
Totalfixed
fixedcosts
costsofofprocess
processor
orequipment
equipment
Unit
Unitprice
priceto
tocustomer
customer --Variable
Variablecosts
costsper
perunit
unit

This formula can be used to find any of its components algebraically if the
other parameters are known
Break-Even Analysis (Continued)
•• Example:
Example: Suppose
Supposeyou youwant
wantto topurchase
purchaseaanew
newcomputer
computerthatthat
will
willcost
cost$5,000.
$5,000. ItItwill
willbebeused
usedto
toprocess
processwritten
writtenorders
ordersfrom
from
customers
customerswhowhowill
willpay
pay$25
$25each
eachfor
forthe
theservice.
service. The
Thecost
costofof
labor,
labor,electricity
electricityand
andthetheform
formused
usedto
toplace
placethe
theorder
orderisis$5
$5per
per
customer.
customer. How
Howmany
manycustomers
customerswill
willwe
weneed
needtotoserve
servetotopermit
permit
the
thetotal
totalrevenue
revenueto tobreak-even
break-evenwithwithour
ourcosts?
costs?
•• Break-even
Break-evenDemand:
Demand:
== Total
Totalfixed
fixedcosts
costsof
ofprocess
processor
orequip.
equip.
Unit
Unitprice
priceto
tocustomer
customer––Variable
Variablecosts
costs
=5,000/(25-5)
=5,000/(25-5)
=250
=250customers
customers