Homework #2

Break-Even Analysis and Make-Buy Problems Using Excel

Make or Buy Example

Power Notebooks, Inc. plans to manufacture a new line of notebook computers. Management is trying
to decide whether to purchase the LCD screens for the computers from an outside supplier or to
manufacture the screens in-house. The screens cost $100 each from the outside supplier. To set up the
assembly process required to produce the screens in-house would cost $100,000. The company could
then produce each screen for $75. The number of notebooks that eventually will be produced (Q) is
unknown at this point.
a. Set up a spreadsheet that will display the total cost of both options for any value of Q. Use trial-and-
error with the spreadsheet to determine the range of production volumes for which each alternative
is best.
If Power Notebooks purchases the screens, the fixed cost is $0 and the unit cost is $100. These data
are entered into B2:B3.

If Power Notebooks manufactures the screens, the fixed cost is $100,000 and the unit cost is $75.
These data are entered into D2:D3.

The number of LCD screens needed (Q) is unknown. Cell C6 will be used for this quantity.

In general, Total Cost = Fixed Cost + (Unit Cost)(LCD Screens Needed). This formula is entered into B4
and D4.

Trial and error with the spreadsheet shows that purchasing is cheaper if Q < 4000, manufacturing is
cheaper if Q > 4000, and the costs are identical when Q = 4000.

The spreadsheet is shown below.

b. Use a graphical procedure to determine the break-even point for Q (i.e., the quantity at which both
options yield the same cost).
To determine the ranges of Q for which each source is cheapest, graph the total cost versus Q, as
shown below. The total cost lines cross at Q = 4,000. This is the break-even point for Q.

c. Use an algebraic procedure to determine the break-even point for Q.

The total cost if Power Notebooks purchases the LCD screens is TCpurchase = ($100)Q.
The total cost if Power Notebooks manufactures the LCD screens is TCmanufacture = $100,000 + ($75)Q.
The break-even point for Q occurs when TCpurchase = TCmanufacture.
($100)Q = $100,000 + ($75)Q when ($25)Q = $100,000, or Q = 4,000.
 Homework…

1. The Shoemaker Family makes shoes. They want to produce a unique leather shoe for women;
however, they want to evaluate whether they can make a profit. They want to find out how many pairs
of shoes they must make to break even. The company has determined that it would cost $2,000 to set
up production to manufacture the shoes. Accounting has provided you the raw data which has
determined each pair would cost approximately $60 marginal cost to make from similar models.
Marketing Research has determined that each pair would sell for $80 based upon similar models. From
the raw data create a pivot table to determine exact average marginal cost and average selling price.

A) Develop a mathematical model for the total cost of producing X pairs of shoes. Use the model cost
from the values in the scenario paragraph.

B) Develop a mathematical model for the total profit from an order for X pairs of shoes. Use the model
cost from the values in the scenario paragraph.

C) Using Excel, how large must the order be before a break-even point is obtained? Use the raw data
and create a pivot table to determine break-even value.

D) The Shoemaker family is second-guessing themselves. They believe costs would be more accurate if
only the sunray model was used. Determine the breakeven from this model’s historic values.

E) Using Excel, Chart possible outcomes to reflect a visualization and breakeven point of the analysis.
(USE THE VALUES FROM THE PARAGRAPH ABOVE).

2. Manhattan Island Associates is a Supply Chain software company based in Atlanta. They offer
computer training seminars on their software systems. In the seminars each student works at a personal
computer, practicing the particular activity that the instructor is presenting. Manhattan Island Associates
is currently planning a two-day seminar on the use of Warehouse Management Systems. The projected
fee for the seminar is $600 per student. The cost for the conference room, instructor compensation, lab
assistants, and promotion is $9600. Manhattan Island Associates spends $120 for the print of materials
for each student.

A) Develop a model for the total cost to put on the seminar. Let x represent the number of students who
enroll in the seminar.

B) Develop a model for the total profit if x students enroll in the seminar.

C) Using Excel, how large must the class be before a break-even point is obtained?

D) Manhattan Island Associates has forecasted an enrollment of 30 students for the seminar. How much
profit will be earned if their forecast is accurate?

D) Using Excel, Chart possible outcomes to reflect a visualization and breakeven point of the analysis.

3. Prior to the arrival of the Oklahoma City Thunder Basketball team, there were preliminary plans for
the construction of the Chesapeake Arena. Oklahoma City officials questioned the number and
profitability of the luxury corporate boxes planned for the upper deck of the arena. Corporations and
selected individuals may buy the boxes for $300,000 each. The fixed construction cost for the upper-
deck area is estimated to be $4,500,000, with a variable cost of $150,000 for each box constructed.

A) What is the breakeven point for the number of luxury boxes in the new arena?

B) Using Excel, Chart possible outcomes to reflect a visualization and breakeven point of the analysis.

C) Preliminary drawings for the stadium show that space is available for the construction of up to 50
luxury boxes. Promoters indicate that buyers are available and that all 50 could be sold if constructed. D)
What is your recommendation concerning the construction of luxury boxes? And, What profit is
anticipated?

4. Management of ToysRnt4U Company needs to decide whether to introduce a certain new novelty
toy for the upcoming Christmas season, then it would be discontinued. The total cost required to
produce and market this toy would be $500,000 plus $15 per toy produced. The company would receive
$35 for each toy sold.

A) Develop a model for the total cost to produce the toy. Let x represent the number of toys produced.

B) Develop a model for the total profit if x amount of toys are sold.

C) Using Excel, how large must sales be before a break-even point is obtained?

D) Using Excel, Chart possible outcomes to reflect a visualization and breakeven point of the analysis.

5. Using the same Excel spreadsheet…recalculate/reformulate the problem, using the GoalSeek
function of Excel. Management of ToysRnt4U Company needs to decide whether to introduce a certain
new novelty toy for the upcoming Christmas season, then it would be discontinued. The total cost
required to produce and market this toy would be $500,000 plus $15 per toy produced. The company
would receive $35 for each toy sold.

6. Rockwall Industries is a technology subcontractor for the United States Navy. They are providing a
new computer system to be installed throughout the Navy installations. However, the computer system
requires a unique harness which attaches to legacy systems. The problem is that manufacturing
harnesses is not a core competency of Rockwall Industries. Accountants form Rockwall Industries have
calculated that if they were manufacture the harnesses in-house, each harness would cost
approximately $35 (from data from previous builds) to manufacture with fixed costs being $225,000 to
establish a set-up to produce. Rockwall has also subcontracted with Steadfast Harnesses in the past.
Steadfast Harnesses has quoted each unit cost to be $50 if they were to be contracted for the job. In
addition, Rockwall has determined that there would be a fixed one-time administration charge from the
vendor of $50,000 to do business. Use the Excel Problem 6 Worksheet to solve, along with the raw data
in worksheet (Problem 6 raw). Create a pivot table to determine exact values.

A) What is the amount of harnesses required for Rockwall to be feasible to Make rather than buy from
an external vendor?
Rockwall estimates that they will need 12,000 harnesses.

A) What is the total cost to purchase from Steadfast Harnesses?

B) What is the total cost to make in house?

C) What is your decision… make or buy? Why?

D) Using Excel, Chart possible outcomes to reflect a visualization and breakeven point of the analysis.

7. Stone’s Throw Hospital has a large demand for occupational therapists. The annual demand requires
that the therapist see 20 patients a week for 48 weeks a year to keep up with the demand. The human
resources manager has determined that they could hire a therapist that would make $200 for each
therapy given to each patient. Furthermore, the hospital would have to generate a benefits package that
would cost them $50,000 to hire the therapist. The HR manager also knows that she can work with a
local contracting therapy company that would provide therapy for the demand of patients for
$250/each patient, plus a contract/administration fee for $5,000.

A) What is the total cost to contract the therapy from a local company?

B) What is the total cost to provide in-house therapy?

C) What is your decision… make or buy? Why?

D) Using Excel, Chart possible outcomes to reflect a visualization and breakeven point of the analysis.