Break-Even Analysis
Chapter 6a
McGraw-Hill/Irwin
Copyright © 2013 by The McGraw-Hill Companies, Inc. All rights reserved.
Trade-Offs


The choice of specific equipment to use in
production processes can be based upon an
analysis of cost trade-offs
Often the choice is between specialized and
general equipment
 Specialized
equipment may require a higher initial
investment, but can perform more efficiently over the
long run
 General equipment often has a lower initial investment,
but lacks the efficiency of a specialized machine
6a-2
Break-Even Analysis

One means of choosing between two options is a
break-even analysis
 Understanding
how profits (and losses) change for each
option as the total number of units varies

This is particularly suitable when processes have a
significant initial investment (fixed cost) and when
production costs vary in proportion to the number of
units produced (variable costs)
Excel: Break-Even
Calculations
6a-3
Example 6A.1

A manufacturer is considering three options for
obtaining a machined part
 Buy
the part from a supplier for $200 per unit (no
fixed cost)
 Purchase
Cost = $200 x Demand
 Make
the part on a semi-automatic lathe for $75 per
unit (fixed costs of $80,000)
 Purchase
Cost = $80,000 + $75 x Demand
 Make
the part with a machining center for $15 per unit
(fixed costs of $200,000)
 Purchase
Cost = $200,000 + $15 x Demand
6a-4
Example 6A.1- Calculate Break-Even
Points
Break-even point A – set
total cost for option 2 equal
to total cost for option 3 and
solve for D
Break-even point B – set total
cost for option 1 equal to
total cost for option 2 and
solve for D
6a-5
Example 6A.1- Chart the Alternatives
Break-even point between machine center and
buy option is not relevant
Break-even point
A. Machine center
becomes efficent
Break-even point B.
Semiautomatic
lathe becomes
efficent
6a-6