B k E l B k E l Bakery Example Bakery Example

Actual production last week = Actual production last week = 148,000 148,000 rolls rolls
Effective capacity = Effective capacity = 175,000 175,000 rolls rolls Effective capacity Effective capacity 175,000 175,000 rolls rolls
Design capacity = Design capacity = 1,200 1,200 rolls per hour rolls per hour
Bakery operates Bakery operates 77 days/week, days/week, 3 3 -- 8 8 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600 = (7 x 3 x 8) x (1,200) = 201,600 rolls rolls Design capacity Design capacity (7 x 3 x 8) x (1,200) 201,600 (7 x 3 x 8) x (1,200) 201,600 rolls rolls
2008 Prentice Hall, Inc. S7 1
B k E l B k E l Bakery Example Bakery Example
Actual production last week = Actual production last week = 148,000 148,000 rolls rolls
Effective capacity = Effective capacity = 175,000 175,000 rolls rolls Effective capacity Effective capacity 175,000 175,000 rolls rolls
Design capacity = Design capacity = 1,200 1,200 rolls per hour rolls per hour
Bakery operates Bakery operates 77 days/week, days/week, 3 3 -- 8 8 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600 = (7 x 3 x 8) x (1,200) = 201,600 rolls rolls Design capacity Design capacity (7 x 3 x 8) x (1,200) 201,600 (7 x 3 x 8) x (1,200) 201,600 rolls rolls
2008 Prentice Hall, Inc. S7 2
B k E l B k E l Bakery Example Bakery Example
Actual production last week = Actual production last week = 148,000 148,000 rolls rolls
Effective capacity = Effective capacity = 175,000 175,000 rolls rolls Effective capacity Effective capacity 175,000 175,000 rolls rolls
Design capacity = Design capacity = 1,200 1,200 rolls per hour rolls per hour
Bakery operates Bakery operates 77 days/week, days/week, 3 3 -- 8 8 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600 = (7 x 3 x 8) x (1,200) = 201,600 rolls rolls Design capacity Design capacity (7 x 3 x 8) x (1,200) 201,600 (7 x 3 x 8) x (1,200) 201,600 rolls rolls
Utilization Utilization = 148,000/201,600 = 73.4% = 148,000/201,600 = 73.4%
2008 Prentice Hall, Inc. S7 3
B k E l B k E l Bakery Example Bakery Example
Actual production last week = Actual production last week = 148,000 148,000 rolls rolls
Effective capacity = Effective capacity = 175,000 175,000 rolls rolls Effective capacity Effective capacity 175,000 175,000 rolls rolls
Design capacity = Design capacity = 1,200 1,200 rolls per hour rolls per hour
Bakery operates Bakery operates 77 days/week, days/week, 3 3 -- 8 8 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600 = (7 x 3 x 8) x (1,200) = 201,600 rolls rolls Design capacity Design capacity (7 x 3 x 8) x (1,200) 201,600 (7 x 3 x 8) x (1,200) 201,600 rolls rolls
Utilization Utilization = 148,000/201,600 = 73.4% = 148,000/201,600 = 73.4%
2008 Prentice Hall, Inc. S7 4
B k E l B k E l Bakery Example Bakery Example
Actual production last week = Actual production last week = 148,000 148,000 rolls rolls
Effective capacity = Effective capacity = 175,000 175,000 rolls rolls Effective capacity Effective capacity 175,000 175,000 rolls rolls
Design capacity = Design capacity = 1,200 1,200 rolls per hour rolls per hour
Bakery operates Bakery operates 77 days/week, days/week, 3 3 -- 8 8 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600 = (7 x 3 x 8) x (1,200) = 201,600 rolls rolls Design capacity Design capacity (7 x 3 x 8) x (1,200) 201,600 (7 x 3 x 8) x (1,200) 201,600 rolls rolls
Utilization Utilization = 148,000/201,600 = 73.4% = 148,000/201,600 = 73.4%
Efficiency Efficiency = 148,000/175,000 = 84.6% = 148,000/175,000 = 84.6%
2008 Prentice Hall, Inc. S7 5
B k E l B k E l Bakery Example Bakery Example
Actual production last week = Actual production last week = 148,000 148,000 rolls rolls
Effective capacity = Effective capacity = 175,000 175,000 rolls rolls Effective capacity Effective capacity 175,000 175,000 rolls rolls
Design capacity = Design capacity = 1,200 1,200 rolls per hour rolls per hour
Bakery operates Bakery operates 77 days/week, days/week, 3 3 -- 8 8 hour shifts hour shifts
Design capacity Design capacity = (7 x 3 x 8) x (1,200) = 201,600 = (7 x 3 x 8) x (1,200) = 201,600 rolls rolls Design capacity Design capacity (7 x 3 x 8) x (1,200) 201,600 (7 x 3 x 8) x (1,200) 201,600 rolls rolls
Utilization Utilization = 148,000/201,600 = 73.4% = 148,000/201,600 = 73.4%
Efficiency Efficiency = 148,000/175,000 = 84.6% = 148,000/175,000 = 84.6%
2008 Prentice Hall, Inc. S7 6
B k E l B k E l Bakery Example Bakery Example
Actual production last week = Actual production last week = 148,000 148,000 rolls rolls
Effective capacity = Effective capacity = 175,000 175,000 rolls rolls Effective capacity Effective capacity 175,000 175,000 rolls rolls
Design capacity = Design capacity = 1,200 1,200 rolls per hour rolls per hour
Bakery operates Bakery operates 77 days/week, days/week, 3 3 -- 8 8 hour shifts hour shifts
Effi i Effi i 84 6% 84 6% Efficiency Efficiency = 84.6% = 84.6%
Efficiency of new line Efficiency of new line = 75% = 75%
Expected Output = Expected Output = ((Effective Capacity Effective Capacity)( )(Efficiency Efficiency))
(175 000)( 75) 131 250 (175 000)( 75) 131 250 ll ll = (175,000)(.75) = 131,250 = (175,000)(.75) = 131,250 rolls rolls
2008 Prentice Hall, Inc. S7 7
B k E l B k E l Bakery Example Bakery Example
Actual production last week = Actual production last week = 148,000 148,000 rolls rolls
Effective capacity = Effective capacity = 175,000 175,000 rolls rolls Effective capacity Effective capacity 175,000 175,000 rolls rolls
Design capacity = Design capacity = 1,200 1,200 rolls per hour rolls per hour
Bakery operates Bakery operates 77 days/week, days/week, 3 3 -- 8 8 hour shifts hour shifts
Effi i Effi i 84 6% 84 6% Efficiency Efficiency = 84.6% = 84.6%
Efficiency of new line Efficiency of new line = 75% = 75%
Expected Output = Expected Output = ((Effective Capacity Effective Capacity)( )(Efficiency Efficiency))
(175 000)( 75) 131 250 (175 000)( 75) 131 250 ll ll = (175,000)(.75) = 131,250 = (175,000)(.75) = 131,250 rolls rolls
2008 Prentice Hall, Inc. S7 8
Economies and Economies and Economies and Economies and
Diseconomies of Scale Diseconomies of Scale
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75 75 -- room room
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roadside motel roadside motel
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Economies Economies
of scale of scale
Diseconomies Diseconomies
of scale of scale
25 25 50 50 75 75
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d
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2008 Prentice Hall, Inc. S7 9
Number of Rooms Number of Rooms
Figure S7.2 Figure S7.2
Demand and Capacity Demand and Capacity Demand and Capacity Demand and Capacity
Management in the Service Sector Management in the Service Sector
Demand management Demand management
Appointment, reservations, FCFS rule Appointment, reservations, FCFS rule
C it C it Capacity Capacity
management management
Full time, Full time,
temporary, temporary,
part part--time time
staff staff
2008 Prentice Hall, Inc. S7 10
B k B k E A l i E A l i Break Break--Even Analysis Even Analysis
Fixed costs are costs that continue Fixed costs are costs that continue
even if no units are produced even if no units are produced pp
Depreciation, taxes, debt, mortgage Depreciation, taxes, debt, mortgage
payments payments payments payments
Variable costs are costs that vary Variable costs are costs that vary
ith th l f it d d ith th l f it d d with the volume of units produced with the volume of units produced
Labor, materials, portion of utilities Labor, materials, portion of utilities , , p , , p
Contribution is the difference between Contribution is the difference between
selling price and variable cost selling price and variable cost
2008 Prentice Hall, Inc. S7 11
selling price and variable cost selling price and variable cost
B k B k E A l i E A l i Break Break--Even Analysis Even Analysis
Costs and revenue are linear Costs and revenue are linear
Assumptions Assumptions
Costs and revenue are linear Costs and revenue are linear
functions functions
Generally not the case in the real Generally not the case in the real
world world
We actually know these costs We actually know these costs
Very difficult to accomplish Very difficult to accomplish Very difficult to accomplish Very difficult to accomplish
There is no time value of money There is no time value of money
2008 Prentice Hall, Inc. S7 12
yy
B k B k E A l i E A l i Break Break--Even Analysis Even Analysis
BEP BEP
xx
== break break--even point in even point in
units units
BEP BEP
$$
== break break--even point in even point in
d ll d ll
xx == number of units number of units
produced produced
TR TR = = total revenue = Px total revenue = Px
dollars dollars
PP == price per unit (after price per unit (after
all discounts) all discounts)
FF = = fixed costs fixed costs
VV = = variable cost per unit variable cost per unit
TC TC = = total costs = F + Vx total costs = F + Vx
Break Break--even point even point
occurs when occurs when
TR = TC TR = TC
BEP BEP ==
FF
or or
Px = F + Vx Px = F + Vx
BEP BEP
xx
P P -- VV
2008 Prentice Hall, Inc. S7 13
B k B k E A l i E A l i Break Break--Even Analysis Even Analysis
BEP BEP
xx
== break break--even point in even point in
units units
BEP BEP
$$
== break break--even point in even point in
d ll d ll
xx == number of units number of units
produced produced
TR TR = = total revenue = Px total revenue = Px
dollars dollars
PP == price per unit (after price per unit (after
all discounts) all discounts)
FF = = fixed costs fixed costs
VV = = variable cost per unit variable cost per unit
TC TC = = total costs = F + Vx total costs = F + Vx
BEP BEP
$$
= BEP = BEP
x x
PP
PP
FF
Profit Profit = TR = TR -- TC TC
= P = P
==
FF
FF
P P - - VV
Profit Profit = TR = TR -- TC TC
= Px = Px -- ((F + Vx F + Vx))
PP FF VV
==
==
((P P - - VV))/P /P
FF
= Px = Px -- F F -- Vx Vx
= = ((P P - - VV))x x -- FF
2008 Prentice Hall, Inc. S7 14
= =
1 1 -- V/P V/P
B k B k E E l E E l Break Break--Even Example Even Example
Fixed costs Fixed costs = $10,000 = $10,000 Material Material = $.75 = $.75/unit /unit
Direct labor Direct labor = $1.50 = $1.50/unit /unit Selling price Selling price = $4.00 = $4.00 per unit per unit Direct labor Direct labor $1.50 $1.50/unit /unit Selling price Selling price $4.00 $4.00 per unit per unit
BEP BEP = = = =
FF
$10,000 $10,000
BEP BEP
$$
= = = =
1 1 -- ((V/P V/P))
1 1 -- [(1.50 + .75)/(4.00)] [(1.50 + .75)/(4.00)]
2008 Prentice Hall, Inc. S7 15
B k B k E E l E E l Break Break--Even Example Even Example
Fixed costs Fixed costs = $10,000 = $10,000 Material Material = $.75 = $.75/unit /unit
Direct labor Direct labor = $1.50 = $1.50/unit /unit Selling price Selling price = $4.00 = $4.00 per unit per unit Direct labor Direct labor $1.50 $1.50/unit /unit Selling price Selling price $4.00 $4.00 per unit per unit
BEP BEP = = = =
FF
$10,000 $10,000
BEP BEP
$$
= = = =
1 1 -- ((V/P V/P))
1 1 -- [(1.50 + .75)/(4.00)] [(1.50 + .75)/(4.00)]
$$
$10,000 $10,000
= = $22,857.14 = = $22,857.14
$10,000 $10,000
.4375 .4375
BEP BEP
xx
= = = 5,714 = = = 5,714
FF
P P - - VV
$10,000 $10,000
4.00 4.00 -- (1.50 + .75) (1.50 + .75)
2008 Prentice Hall, Inc. S7 16
B k B k E E l E E l Break Break--Even Example Even Example
Multiproduct Case Multiproduct Case
BEP BEP
$$
==
FF
11 ((WW))
VV
ii
1 1 - - x ( x (WW
ii
))
ii
PP
ii
where where VV = variable cost per unit = variable cost per unit
PP = price per unit = price per unit
FF fi d t fi d t FF = fixed costs = fixed costs
WW = percent each product is of total dollar sales = percent each product is of total dollar sales
ii = each product = each product
2008 Prentice Hall, Inc. S7 17
M lti d t E l M lti d t E l Multiproduct Example Multiproduct Example
Annual Forecasted Annual Forecasted
It It P i P i C t C t S l U it S l U it
Fixed costs Fixed costs = $3,500 = $3,500 per month per month
Item Item Price Price Cost Cost Sales Units Sales Units
Sandwich Sandwich $2.95 $2.95 $1.25 $1.25 7,000 7,000
Soft drink Soft drink .80 .80 .30 .30 7,000 7,000 ,,
Baked potato Baked potato 1.55 1.55 .47 .47 5,000 5,000
Tea Tea .75 .75 .25 .25 5,000 5,000
Salad bar Salad bar 2.85 2.85 1.00 1.00 3,000 3,000 Salad bar Salad bar 2.85 2.85 1.00 1.00 3,000 3,000
2008 Prentice Hall, Inc. S7 18
M lti d t E l M lti d t E l Multiproduct Example Multiproduct Example
Annual Forecasted Annual Forecasted
It It P i P i C t C t S l U it S l U it
Fixed costs Fixed costs = $3,500 = $3,500 per month per month
Item Item Price Price Cost Cost Sales Units Sales Units
Sandwich Sandwich $2.95 $2.95 $1.25 $1.25 7,000 7,000
Soft drink Soft drink .80 .80 .30 .30 7,000 7,000 ,,
Baked potato Baked potato 1.55 1.55 .47 .47 5,000 5,000
Tea Tea .75 .75 .25 .25 5,000 5,000
Salad bar Salad bar 2.85 2.85 1.00 1.00 3,000 3,000
Annual Weighted
Selling Variable Forecasted % of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
Salad bar Salad bar 2.85 2.85 1.00 1.00 3,000 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 .117
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$
2008 Prentice Hall, Inc. S7 19
$46,300 1.000 .625
M lti d t E l M lti d t E l
F
Multiproduct Example Multiproduct Example
BEP
$
=
F
1 - x (W
i
)
V
i
P
Annual Forecasted Annual Forecasted
It It P i P i C t C t S l U it S l U it
Fixed costs Fixed costs = $3,500 = $3,500 per month per month

P
i
= = $67,200
$3,500 x 12
625 Item Item Price Price Cost Cost Sales Units Sales Units
Sandwich Sandwich $2.95 $2.95 $1.25 $1.25 7,000 7,000
Soft drink Soft drink .80 .80 .30 .30 7,000 7,000
$67,200
.625
Daily
= = $215 38
$67,200
,,
Baked potato Baked potato 1.55 1.55 .47 .47 5,000 5,000
Tea Tea .75 .75 .25 .25 5,000 5,000
Salad bar Salad bar 2.85 2.85 1.00 1.00 3,000 3,000
Annual Weighted
Selling Variable Forecasted % of Contribution
Item (i) Price (P) Cost (V) (V/P) 1 - (V/P) Sales $ Sales (col 5 x col 7)
sales
= = $215.38
312 days
.446 x $215.38 Salad bar Salad bar 2.85 2.85 1.00 1.00 3,000 3,000
Sandwich $2.95 $1.25 .42 .58 $20,650 .446 .259
Soft drink .80 .30 .38 .62 5,600 .121 .075
Baked 1.55 .47 .30 .70 7,750 .167 .117
.446 x $215.38
$2.95
= 32.6 33
sandwiches
per day
potato
Tea .75 .25 .33 .67 3,750 .081 .054
Salad bar 2.85 1.00 .35 .65 8,550 .185 .120
$
2008 Prentice Hall, Inc. S7 20
$46,300 1.000 .625