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Costs

Costs. Fixed Costs. Variable Costs. Types of Cost. Ch 5(B) : Capacity Planning: Break-Even Analysis. Operation costs are divided into 2 main groups: Fixed costs Variable costs. Fixed Costs.

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Costs

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  1. Costs Fixed Costs Variable Costs Types of Cost

  2. Ch 5(B) : Capacity Planning: Break-Even Analysis • Operation costs are divided into 2 main groups: • Fixed costs • Variable costs

  3. 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.

  4. Total Fixed Cost and Fixed Cost per Unit of Product Fixed cost per unit of product (F/Q) Total fixed cost (F) Production volume (Q) Production volume (Q)

  5. 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.

  6. Variable Cost per Unit and Total Variable Costs Variable costs Per unit of product Total Variable costs (VQ) (V) Production volume (Q) Production volume (Q)

  7. Total Costs Amount ($) Total cost = F+VQ Total variable cost (VQ) Total Fixed cost (F) 0 Q (volume in units)

  8. 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.

  9. Break-Even Analysis Break-even point is the unit or dollar sales at which an organization neither makes a profit nor a loss. At the organization’s break-even sales volume: Total Revenue = Total Cost

  10. Break-Even Point Profit Total revenue Amount ($) Total cost Loss 0 BEP units Q (volume in units)

  11. Break-Even Computations

  12. Breakeven (BEP) • Q BEP = FC .Times P • P – VC • So: PQbe = FC x P • P - VC • PQbe = FC x P • P/P – VC/P • PQbe = FC atau FC • 1 – VC/P 1 – VC/S • BEP (Rp/US$) = FC atau FC • 1 – VC/P 1 – VC/S

  13. 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.

  14. Total a Unit Sell (400unit) $ 1.000.000 $ 2.500 Variable Cost (VC)600.000 1.500 Contribution Margin $ 400.000 $ 1.000 Fixed Cost (FC)350.000 Net Profit $ 50.000 Q BEP = FC = 350.000 = 350 P – VC 2500 - 1500 Example

  15. BEP (Rp/US$) = FC . 1 – VC/P BEP = FC = 350.000 = 350.000 1 – VC/P 1 – 1500/2500 1 - 0,6 = 350.000 = Rp 875.000 0,4 BEP unit = 875.000 / 2500 = 350 unit

  16. Break even in units = 1,200,000 Break even in $ = 1,200,000 x 24 = $28,800,000 Profit Loss Break even point Fixed expense

  17. A Simple technology • An Intermediate technology • An Advanced technology • General purpose machines • Multi-purpose machines • Special purpose machines • Low F high V • In between • High F Low V BEA for Multiple Alternatives Break-even analysis for multiple alternatives: Such an analysis is implemented to compare cases such as In general, when we move from a simple technology to an advanced technology; F  V

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