Question

Scenario Suppose that you were recently hired as the operations manager for ABC Manufacturing, a small manufacturing company founded two years ago. The company has been reasonably successful since it was founded, but has recently been experiencing several production issues. You were hired to recommend and implement improvements to get the company back on track. Problems Complete the following problems based on the ABC Manufacturing scenario above. For each question, briefly describe the operations management issue and describe how you would approach an analysis, then provide answers to the algebraic equations.

Question 1. ABC Manufacturing is unsure of the ideal price to quote for one of their products, a pump. ABC's president has asked you to do a break even analysis for the pump, and to recommend the optimal price. The fixed costs (FC) associated with manufacturing this particular product are $100,000, and the variable costs (VC) are $50 per unit. ABC's president is considering a selling price (P) for this product of $100. The president wants to know how many units have to be sold in order to break even (BEU). Analyze this operations management issue. Provide the algebraic equation (using BEU, FC, P, and VC as variables) for the breakeven analysis. Calculate and provide the numeric breakeven value.

Answer 1

A. The ABC company must recover the fixed costs and cover the variable cost incurred in manufacturing the pumps. The price of the pump should be optimized to cover cost both fixed and variable yet ensure the pumps are competitively priced to match the market requirements. The company has to ensure the customers accept the company price and also the company can make sufficient profits. B. the break-even formula for defining number of units is as follows: Algebraic formula: BEP=FC/(P-VC) =100,000/(100-50) Pumps 2000 Units C. The break event point (units) is 2000, taking Fixed Cost of $100,000, VC $ 50 per unit and assuming price of $ 100 per unit. D. The break event value is number of Breakeven units x Price per unit. It is calculated as follows: : BEP value= (BEP units x Price per unit) =2000 x 100 $ 200,000.00

It can be calculated in excel as follows C A B Breakeven Analysis 1 2. 3 Formulas B 1 Breakeven Analysis 2 3 Cost vs. Revenue 4 5 Data 6 Option 1 7 Fixed cost 100000 8 Variable cost 50 9 Revenue 100 10 Cost vs. Revenue 4 5 Data 6 Option 1 7 Fixed cost 100,000 8 Variable cost 50 9 Revenue 100 10 11 12 Results 13 Breakeven points 14 Units 2000 15 Dollars $ 200,000.00 11 12 Results 13 Breakeven points 14 Units 15 Dollars =B7/(B9-B8) =B7+B8*B14