Scribd
Upload
100 views20 pages

L25-28 Costs - and - Breakeven - Slides

Here are the steps to solve this problem: 1. Calculate the total annual cost for each engine by adding annualized capital cost, maintenance cost, and fuel cost. 2. Annualized capital cost = Capital cost / Present value of annuity factor at 15% interest rate over 5 years 3. Plot total annual cost vs hours of operation for each engine on a graph 4. Identify the range of hours where each engine has the lowest total annual cost 5. Recommend the most economical engine based on the expected annual hours of operation. This break-even analysis will help the contractor determine the best engine option based on the operating requirements of the bulldozer. Plotting the costs

Uploaded by

Dpt Htegn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
100 views20 pages

L25-28 Costs - and - Breakeven - Slides

Here are the steps to solve this problem: 1. Calculate the total annual cost for each engine by adding annualized capital cost, maintenance cost, and fuel cost. 2. Annualized capital cost = Capital cost / Present value of annuity factor at 15% interest rate over 5 years 3. Plot total annual cost vs hours of operation for each engine on a graph 4. Identify the range of hours where each engine has the lowest total annual cost 5. Recommend the most economical engine based on the expected annual hours of operation. This break-even analysis will help the contractor determine the best engine option based on the operating requirements of the bulldozer. Plotting the costs

Uploaded by

Dpt Htegn
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
You are on page 1/ 20

Calculating a

break-even point
Tom can hire an ice-cream van for an afternoon
at a summer fete. The van hire will be Rs 100 and
the cost of cornets, ice cream etc will 50p per
ice cream.
Tom thinks a sensible selling price will be Rs 1.50.
At this price, how many ice-creams must he sell to
cover his costs?
Calculating this will help Tom to decide if the idea
is worthwhile.
The basics of break-even
analysis 1
• Businesses must make a profit to survive
• To make a profit, income must be higher than
expenditure (or costs)

Income £50,000 Income £50,000


Costs £40,000 Costs £60,000
Profit £10,000 Loss £10,000
The basics of break-even
analysis 2
There are two types of costs:
• Variable costs increase by a step every
time an extra product is sold (eg cost of
ice cream cornets in ice cream shop)
• Fixed costs have to be paid even if no
products are sold (eg rent of ice cream
shop)
The break-even point
• Variable + fixed costs = total costs
• When total costs = sales revenue, this is
called the break-even point, eg
– total costs = £5,000
– total sales revenue = £5,000

• At this point the business isn’t making a


profit or a loss – it is simply breaking even.
Drawing a break-even chart 1

Tom's ice creams

450
Cost/Revenue £

400
350
300
250
200
150
100
50
0
0 100 200 300
Number sold
Drawing a break-even
chart 2
Tom's ice creams

450
Cost/Revenue £

400
350
300
250
200
150 Fixed Cost
100
50
0
0 100 200 300

Number sold
Drawing a break-even
chart 3
Tom's ice creams

450
Cost/Revenue £

400
350
300
250
200 Total Cost
150 Fixed Cost
100
50
0
0 100 200 300
Number sold
Drawing a break-even
chart 4
Tom's ice creams

450
Cost/Revenue £

400
350
300
250 Sales Revenue
200 Total Cost
150 Fixed Cost
100
50
0
0 100 200 300
Number sold
Identifying the break-
even point
Tom's ice creams

450
Cost/Revenue £

400
350 Profit
300 Sales Revenue
250
Total Cost
200
Fixed Cost
150 Loss
100 Break-even point
50
0
0 100 200 300
Number sold
Examples of costs
These vary, depending upon the type of business.
Typical costs include:

• Variable: materials, labour, energy


• Fixed: rent, business rates, interest on
loans, insurance, staff costs (e.g. security)
Using a formula to calculate
the break-even point
The break-even point =
Fixed costs

(Selling price per unit minus variable cost per unit)


Applying the formula
Fixed costs

(Selling price per unit minus variable cost per unit)

Tom: 100
= 100
(1.50 – .50)
Assumptions in BE
Analysis
• Costs can be classified into fixed and variable costs,
thus ignoring semi variable costs.

• Selling price of the product is assumed constant.

• It assumes constant rate of increase in variable costs.

• It assumes no improvement in technology and labour


efficiency.

• Production and sales are synchronized.


Uses
• It helps in determining optimum level of output below which
it would incur loss.
• It helps in determining the target capacity for a firm to get
the benefit of minimum unit cost of production.
• It helps in deciding which product to be produced and which
to be bought by firm.
• Plant expansion or contraction decisions are often based on
BEA of the perceived situation.
• Impact in changes in prices and costs on profits can also be
analyzed.
• Decisions regarding dropping or adding a product.
• It evaluates financial yields, hence helps in choice between
various alternatives.
• Helps in identifying the selling price of a product.
A manufacturer sells his product at
Rs. 5each, variable cost are Rs.
2/unit and the fixed amount of Rs.
60000,
i. Calculate the BEP
ii. What would be the profits if firm sells
30000 unit.
iii. What would be the BEP if firms spends
Rs. 3000 on advertising.
iv. How much the manufacturer sell to
make profits of Rs. 30000.
Comparison of Alternatives
• BE analysis can be used for comparing different
alternatives that are available for producing a
particular product.

• These differ in terms of costs associated with


them at different levels of output.

• Example at lower levels of output manual operated


techniques may be profitable (because of minimum
FC) and not profitable at higher outputs because
of higher VC.
Thus solve with costs associated with
different alternatives and determine the
range of output where each alternative will
be economical.

Costs

Q1 Q2 Q3
Units of Output
Numerical 1
A 50 HP motor is required to drive a pump to remove water from a
tunnel. The unit will be needed for a period of 4 years.
Two alternatives are under consideration.
Alternative A calls for the construction of a power line and purchase
of the electric motor at a total cost of $4900. The salvage value of
this equipment after 4 years is estimated to be $700.
The cost of the current for the per hour of the operation is
estimated to be $2.94 and the maintenance is estimated as $420 per
year.
Alternative B calls for purchase of diesel engine pump set at a cost of
$1925 and it will have no salvage value at the end of 4 years period.
The cost of diesel per hour of operation is estimated at $1.47
maintenance is estimated at $0.53 per hour operation and the cost of
wages chargeable when the engine runs is $2.8 per hour.
How many hours per year the two machines have to run so that the
two alternatives incur equal costs. If the no. of hours of operation is
estimated at 100 hours which alternative is more economical. Take
interest rate at 10% per year.
Numerical 2
A contractor is offered his choice of either gasoline, diesel or butane
engine to power a bulldozer he is to purchase.
• The gasoline engine will cost $2000 and will have a estimated
maintenance cost of $200 per year and will consume $3.6 worth of
fuel per hour of operations.
• The diesel engine will cost $2,800 and will cost an estimated $240
per year to maintain and will consume $3.30 worth of fuel per hour.
• The butane engine will cost $3,300 and will cost $315 per year to
maintain and will consume $2.9 worth of fuel per hour of operation.
Since the salvage value of the engine is identical it can be neglected.
All other costs associated with the three engines are equal and the
interest rate is 15%. The service life of each engine is 5 years.
• Plot the total annual cost of each engine as a function of no. of
hours of operation/year.
• Find the range of no. of hours of operation for which it would be
most identical to specify the gasoline, diesel and butane engines.

You might also like

pFad - Phonifier reborn

Pfad - The Proxy pFad of © 2024 Garber Painting. All rights reserved.

Note: This service is not intended for secure transactions such as banking, social media, email, or purchasing. Use at your own risk. We assume no liability whatsoever for broken pages.


Alternative Proxies:

Alternative Proxy

pFad Proxy

pFad v3 Proxy

pFad v4 Proxy