QUANTITATIVE TOOLS

USED IN
PRODUCTION MANAGEMENT
 QUANTITATIVE TOOLS
1. Breakeven Analysis
– Linear
– Quadratic
2. Linear Programming using Graphical Method
BREAKEVEN ANALYSIS
 Breakeven Analysis Defined
• Breakeven analysis examines the short run
relationship between changes in volume and
changes in total sales revenue, expenses and net
profit
• Also known as C-V-P analysis (Cost Volume Profit
Analysis)
 Uses of Breakeven Analysis
• C-V-P analysis is an important tool in terms of
short-term planning and decision making.

• It looks at the relationship between costs,

revenue, output levels and profit.

• Short run decisions where C-V-P is used

include choice of sales mix, pricing policy etc.
 Decision making and
Breakeven Analysis

• It analysis attempts to answer the on questions:

(1) What sales volume is required to break even?
• (2) What sales volume is necessary in order to earn a
desired (target) profit?
• (3) What profit can be expected on a given sales
volume?
• (4) How would changes in selling price, variable costs,
fixed costs, and output affect profits?
Break-Even Analysis: Graphical Approach

© 2007 Wiley
 Break-Even Analysis

• Total cost = fixed costs + variable costs (quantity):

TC = F + (VC )Q
• Revenue = selling price (quantity)

TR = (SP )Q
• Break-even point is where total costs = revenue:

TR = TC
© 2007 Wiley
 Example
• A firm estimates that the fixed cost of
producing a line of footwear is $52,000 with
a $9 variable cost for each pair produced.
They want to know:
– If each pair sells for $25, how many pairs
must they sell to break-even?
– If they sell 4000 pairs at $25 each, how
much money will they make?

© 2007 Wiley
– If each pair sells for $25, how many pairs
must they sell to break-even?

• GIVEN: TFC = 52,000 VC/U = 9, SP/U = 25

• AT BREAKEVEN POINT
• TR= TC
– If they sell 4000 pairs at $25 each, how
much money will they make?

• GIVEN: SP/U = 25 Q = 4,000

• AT BREAKEVEN POINT
• TR= PXQ
 PROCESS SELECTION WITH
BREAKEVEN ANALYSIS
• Several quantitative techniques are available
for selecting a process.
• One that bases its decision on the cost trade
offs associated with demand volume is
breakeven analysis.
• Let us assume the Demand is 1,668
• TC A = 3,000 + 5 (1,668)
= 11, 340
• TC B = 8,000 + 2 ( 1,668)
• = 11, 336
BREAK EVEN ANALYSIS
USING QUADRATIC
FORMULA
 QUADRATIC EQUATIONS
•To use the quadratic formula the
equations must be in descending order
equal to zero (aka Standard Form).
•All quadratic equations can be written
in this form where: a, b, and c are
constants and “a” cannot be zero.

ax + bx + c = 0
2
BACK
THE QUADRATIC FORMULA

− b  b − 4ac
2

2a
 QUADRATIC FORMULA
We have to remember the standard form of a quadratic
equation.
ax + bx + c = 0
2

The quadratic formula is really a rearranged

version of the standard form of a quadratic
equation. It can be rearranged to solve for x. It
could be rewritten to read as below.

− b  b − 4ac2
x=
2a
BACK
 USING THE FORMULA

Look at the quadratic equation below and

compare
it to the standard form of a quadratic
equation.

x + 5x + 6 = 0
2

ax + bx + c = 0
2

BACK
 USING THE FORMULA

x + 5x + 6 = 0
2

ax + bx + c = 0
2

Simply list your a, b, and c values from your quadratic

equation and plug them into the quadratic formula.

a=1 (if there is no number before x2, assume

a = 1).
b=5
c=6
BACK
 USING THE FORMULA

x 2 + 5x + 6 = 0
a=1
b=5
c=6

− b  b 2 − 4ac
x=
2a

BACK
 USING THE FORMULA

− b  b − 4ac
2
a=1
x= b=5
2a c=6

Replace a, b, and c in the formula and look what

you have.

− 5  (5) − 4(1)( 6)
2
x=
2(1)
BACK
USING THE FORMULA

− 5  (5) 2 − 4(1)( 6)
x=
2(1)

− 5  25 − 24
=
2

−5 1 − 5 1
= =
2 2

BACK
 USING THE FORMULA

− 5 1
=
2
− 5 +1 − 5 −1
= =
2 2
= −2 = −3
− 2,−3
 Graphing Total Costs and Revenue

200

Maximum TR
Profit
Cost and Revenue

150
TC
TC
Q
Break-Even Q
100 TR
Point
Parallel to
TR curve

50

TFC

0 10 20 30 40 50 60 70 80 90
Output
 Steps:
1. Determine TR and TC function.
2. Determine the Profit function.
3. Compute for BREAKEVEN using Quadratic
Formula
4. Solve for the quantity to maximize profit
5. Solve for the maximum profit
 Formula

− b  b − 4ac
2
x=
2a
−b
Z max Q =
2a

4ac − b ^ 2
Z max =
4a
 Business Application
• The Price/demand function for a new product is
P = 50 – 1.25Q
• The cost function is
TC = 160 + 10Q
Determine the following:
1. Revenue function
2. Profit function
3. How many items must be sold for the company to
breakeven?
4. How many items must be sold for the company to
maximize profit?
5. Compute for the maximum profit.