Locational break even analysis operations management
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Semi-Variable Costs Whilst the distinction between fixed and variable costs is a convenient way of categorising business costs, in reality there are some costs which are fixed in nature but which increase when output reaches certain levels. Each site under consideration must be scored for each factor so that a site's overall score can be determined. Budgeting and Setting Targets Break-even charts and calculation be used for budgeting process, since the business know exactly how many units need to be sold in order to break-even. Comparisons can be made between different options by constructing new charts to show changed circumstances. Let us visit a new Health-care facility, once again. While this has some intuitive appeal, it should be noted that transportation costs may vary dramatically as distances and volumes change. Assumptions of Break-Even Analysis : The break-even analysis is based upon the following assumptions: i All elements of cost, i.

Therefore, the location in census tract F is a better location. Smaller volumes might be transported by an independent carrier as a partial load in a truck. The concept of margin of safety might not be useful for businesses with seasonal demand for their products or services, since there will be a lot of variations on monthly basis. Centre of Gravity Centre of gravity is based primarily on cost considerations. Depending on the industry, a load may be shipments from suppliers, between plants, or to customers, or it may be customers or employees travelling to or from the facility. Under this method, the variable cost line is drawn first and then fixed cost line is drawn over and parallel to le variable cost line. Increasing Costs as a Range As with most production systems, the cost of production does not necessarily increase with each individual unit, but rather once an organization reaches a threshold or surpasses a certain volume.

It can be expressed on per unit basis or for the total amount. The cash breakeven point may be defined as that point of sales volume at which total revenue is equal to total cash cost. A Bremerton B Tulsa C San Diego D Virginia Beach 10. The diagram clearly shows how a change in cost or selling price can impact the overall profitability of the business. In such a situation managers would want to reduce costs, so that margin of safety can be increased.

Limitations of Break-Even Charts 9. The company can then subtract the fixed costs of production from the contribution margin until the company achieves profitability. How to Do a Breakeven Analysis To conduct a breakeven analysis, use this formula: Fixed Costs divided by Revenue per unit - Variable costs per unit So before you apply the formula you need to know: Fixed Costs Fixed costs are costs that must be paid whether or not any units are produced. Cost-volume profit analysis looks to determine the for different sales volumes and cost structures, which can be useful for managers making short-term economic decisions. Your authors identify eight major components of volume and revenue for service firms that weight heavily on the selection of the service site.

There are three methods of drawing a break-even chart. As the business produces more and more goods and services, these costs increase proportional. Open Hint for Question 10 in a new window. Break-even point can also be calculated in sales value Dollars. The greatest difficulty arises in the assignment of the scores and weights for the factors; it is likely that a slight change in either would yield a different choice as a best location. The result could be complied for an entire year, so that seasonal fluctuations are removed. Profit-Volume Graph : Profit-volume graph is a pictorial representation of the profit-volume relationship.

The equation produces a precise break-even result. If the managers think that 1000 units can only be sold if price is lowered, break-even point should be re-calculated taking into account the change. These methods of drawing break-even chart have been explained with the help to the following illustration. An economic comparison of locations can be made by identifying the fixed costs and variable costs plotting the breakeven analysis on graph for each location. This would raise your breakeven unit sales to 7000 - anything less means your was not successful.

It is assumed that all units produced are sold. If we use the population as the loads and use rectilinear distance, which location is better in terms of its total load- distance score? Costs and sales revenue are represented on vertical axis, i. The break-even charts help in knowing and analysing the profitability of different products under various circumstances. Solution: The total score for location 2 is higher than that of location 1. The contribution margin is used in the determination of the break-even point of sales.

The factory has a maximum capacity of 20,000 units and it anticipates selling 15,000 units each period. Advantages of Break-Even Charts : Computation of break-even point or presentation of cost, volume and profit relationship by way of break-even charts has the following advantages: i. Question 9 Sibon plc manufactures soft toys for the European market. The centre of gravity method takes into account the locations of plants and markets, the volume of goods moved, and transportation costs in arriving at the best location for a single intermediate warehouse. The total cost line represents the combined sum of both variable and total cost, since both must be taken into account in order to determine profitability. Graphic Method of Break-Even Analysis : The break-even point can also be computed graphically.