Breakeven and Payback Analysis: Dr. Saraa Al - Asadi Salasadi@uob - Edu.bh
Breakeven and Payback Analysis: Dr. Saraa Al - Asadi Salasadi@uob - Edu.bh
Breakeven and Payback Analysis: Dr. Saraa Al - Asadi Salasadi@uob - Edu.bh
College of Engineering
Department of Mechanical Engineering
Breakeven and
Payback Analysis
Dr. Saraa Al -asadi
s a l a s a d i@u o b .e d u .b h
b y Q a s Al a s a d i
Purpose Learning Sections
Outcomes
CONTENT
Chapter Tutorial
Summary Session
Purpos e
14.29% comple te Page 02 of 15
Purpose
Determine the
breakeven for one
or two alternatives
and calculate the
payback period with
and without a
return required.
Le arning
Outcome s
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Page 02 of 15
Learning Outcomes
TOPIC SECTION OUTCOME
Breakeven analysis
finds the value of a
1 Breakeven point QBE is
parameter that makes
two elements equal . 2 determined from mathematical
relations, for example,
Product revenue .
Product costs .
Breakeven analysis is
Materials supply and demand .
fundamental to evaluations such
Other parameters that involve
as make-buy decisions. when a
decision is needed about the 3 the parameter Q .
source for manufactured
components, services, etc.
13.1 Breakeven Analysis for
a Single Project
Fixed costs (FC)
don't vary with level of production
(a) How does the increased production level of 72 units per month compare with the
current breakeven point?
(b)What is the current profit level per month for the facility?
(c) What is the difference between the revenue and variable cost per damper that is
necessary to break even at a significantly reduced monthly production level of 45 units,
if fixed costs remain constant?
13.1 Breakeven Analysis for a Single Project
EXAMPLE 13.1 Unit = damper
𝑭𝑭𝑭𝑭 𝟐𝟐. 𝟒𝟒 × 𝟏𝟏𝟏𝟏^𝟔𝟔
a) 𝑸𝑸𝑩𝑩𝑬𝑬 = =
𝒓𝒓 − 𝒗𝒗 𝟕𝟕𝟕𝟕, 𝟎𝟎𝟎𝟎𝟎𝟎 𝟑𝟑𝟑𝟑, 𝟎𝟎𝟎𝟎𝟎𝟎
𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
= 60 𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎
(
𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎𝒎
)
b) Profit = 𝒓𝒓 − 𝒗𝒗 𝑸𝑸 − 𝑭𝑭𝑭𝑭
𝑭𝑭𝑭𝑭
c) 𝑸𝑸𝑩𝑩𝑬𝑬 =
𝒓𝒓 − 𝒗𝒗
𝟐𝟐.𝟒𝟒×𝟏𝟏𝟏𝟏^𝟔𝟔 $ $
𝟒𝟒𝟒𝟒 = ---- > r - v = 53.33 (
𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅𝒅 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
)
𝒓𝒓−𝒗𝒗
13.3 Payback Analysis Exercise 1
The maintenance department is considering purchasing anew lath machine. The machine
cost BD 10,000 and can be used for 5 years, with no salvage value. The machine; revenue
is BD8/unit and variable cost is BD3/unit. Using15% MARR:
Q > QBE,
there is a profit
13.3 Payback Analysis Exercise 2
Handheld fiber optic meters with white light polarization are useful for measuring
temperature, pressure, and strain in electrically noisy environments. The fixed costs
associated with manufacturing are $800,000 per year. If variable costs are $290 per unit
and the company sells 4000 units per year, at what selling price per unit will the company
break even?
Givins
𝑭𝑭𝑭𝑭
𝑸𝑸𝑩𝑩𝑬𝑬 =
𝒓𝒓 − 𝒗𝒗
FC = 800,000 $/ year
𝟖𝟖𝟖𝟖𝟖𝟖,𝟎𝟎𝟎𝟎𝟎𝟎
v = 290 $/unit 4,800 =
𝐫𝐫 − 𝟐𝟐𝟐𝟐𝟐𝟐
r = ? $/unit
r = 490 $/unit
Q BE = 4,800 units/year
13.3 Payback Analysis Exercise 3
The costs and revenue projections for a new product are estimated. What is the estimated
profit at a production rate of 20% above breakeven?
3 Equate the two relations and solve for the breakeven value
of the variable.
13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.2
Devon Products produces a superior quality, high-gloss, nonskid surface concrete stone
primarily used as flooring in kitchens and baths. The equipment necessary to complete the
nonskid surface operations can be a fully automated or semiautomated machine. The fully
automated machine has an initial cost of $23,000, an estimated salvage value of $4000,
and a predicted life of 10 years. One person will operate the machine at a total cost of $40
per hour. The expected output is 8 tons per hour. Annual maintenance and operating cost
is expected to be $3500.The semiautomatic machine has a first cost of $8000, no
expected salvage value, a 5-year life, and an output of 10 tons per hour; however, an
operator with additional skills is required at the rate of $60 per hour. The machine will
have an annual maintenance and operation cost of $1500. All projects are expected to
generate a return of 10% per year. How many tons of finished stone per year must be
produced to justify the higher purchase cost of the fully automatic machine?
13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.2 Unit = ton
Aw fully = −23,000 (A ∕
P,10%,10)
Givens Fully Auto Semi Auto
+ 4000 (A ∕
F,10%,10)
− 3500
P =−23,000 P = −8000 − 5x
S = 4000 S=0 = –6992 − 5x
FC A =− 3500 A = − 1500
annual n = 10 n=5 Aw semi = −8000 (A ∕
P,10%,5)
$ $
= –6992 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 = −3610 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 − 1500
v v
− 6x
Q Q
VC
= −3610 − 6x
annual
TCfully = TCsemi
$ 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 $ 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
( )( ) ( )( ) Aw fully = Aw semi
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
−6992 − 5x = −3610 – 6x
$ $
= -5X 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 = -6X 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
X = Q BE = 3382
𝒕𝒕𝒕𝒕𝒕𝒕𝒕𝒕 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
( )
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.2 Unit = ton
$
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 If Qest > QBE = 3382
Choose Fully
since its VC slope of 5 is
smaller than the
semiautomatic VC
slope of 6
6992
(a) Number of units to manufacture each year to justify the in-house (make) option.
(b)The maximum capital expense justifiable to purchase machine A, assuming all other
estimates for machines A and B are as stated. The company expects to produce 10,000
units per year.
13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.3 Unit = unit
a)
Givens Make (machine A&B) Buy A wA = −18,000 (A ∕
P,15%,6)
+ 2000 (A ∕F,15%,6)
−6000
$ − 3000 (P∕ F,15%,3)(A ∕
P,15%,6)
FC = −20,352 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
annual
A wB = −12,000 (A ∕
P,15%,4 )
− 500 (A ∕
F,15%,4 )
v Q − 5000
$
VC v = -3.5 ( )
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
annual Aw make A+B = −20,352
$ 𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
( )( )
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 TCmake = TCbuy
$
Aw make = Aw buy
= -0.4 X
$
= -3.5 X 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚 −20,352 − 0.4 x = – 3.5x
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
( )
X = Q BE = 6565 𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.3 Unit = unit
$
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
If Q > QBE = 3382
Choose Make
since its VC slope of 0.4
is smaller than the Buy
VC slope of 3.5
20,352
If Q < QBE = 3382
Choose Buy
since its VC slope of 3.5
is smaller than the
0 Make VC slope of 0.4
𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖𝒖
𝒚𝒚𝒚𝒚𝒚𝒚𝒚𝒚
X = QBE = 6565
13.2 Breakeven Analysis Between Two
Alternatives EXAMPLE 13.3 Unit = unit
b) TCmake = TCbuy
Aw make = Aw buy
-FC – VC = -FC – VC
−P A (A ∕
P,15%,6)+ 2000 (A ∕F,15%,6)
−6000 − 3000 (P∕ F,15%,3)(A ∕P,15%,6) = – 3.5(10,000 )
−12,000 (A ∕
P,15%,4 )− 500 (A ∕
F,15%,4 )
− 5000 − 0.4 (10,000 )
−P A (A ∕
P,15%,6) = $ 15,404 per year
No return Also called simple payback, this is the recovery of only the
i = 0% initial investment with no interest.
a) b)
13.3 Payback Analysis
EXAMPLE 13.5
Two equivalent pieces of quality inspection equipment are being considered for purchase
by Square D Electric. Machine 2 is expected to be versatile and technologically advanced
enough to provide net income longer than machine 1.
a) No return 0% it could be solved by CMPD & Cash button -- > PBP Machine 1 : uniform
Machine 1 Machine 2
Fixed costs: Initial investment of $80,000 with $1000 annual operating cost.
Variable cost: $8 per unit.
Revenue: Twice the variable cost for the first 5 years and 50% of the variable cost
thereafter.
Mac Enterprises purchased an addition laser cutting machine to its current equipment
at a cost of $70,000.Extra annual expenses are expected to be $1850, and extra
income are expected to be $14,000 per year. How long will it take for the company
to recover its investment at
a) i= 0 % .
b) interest rate of 10% per year.
Uniform a) No return 0%
𝑷𝑷 𝟕𝟕𝟕𝟕,𝟎𝟎𝟎𝟎𝟎𝟎
np = = = 5.76 years
𝑵𝑵𝑵𝑵𝑵𝑵 𝟏𝟏𝟏𝟏,𝟎𝟎𝟎𝟎𝟎𝟎−𝟏𝟏,𝟖𝟖𝟖𝟖𝟖𝟖
Cash button -- > PBP or CMPD -- > n
b) Discounted i = 15%
0 = -70,000 + (14,000 – 1850 )(P/A, 10%,np )
b) Discounted i = 15%
0 = -10,000 + 4,000 (P/A, 15%,np )(P/F, 15%,2)
c) Discounted i = 15%
selected
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