MBA M006 OPERATIONS MANAGEMENT

1. The owner of Happy Berry Pies is contemplating adding a new line of pies, which will require
leasing new equipment for a monthly payment of Php 5,000. Variable costs would be Php 12.50
per pie, and pies would retail for Php 17 each.

a. How many pies must be sold in order to breakeven?

FC = Php 5,000
VC = Php 12.50
P = Php 17

Solution:

TR = TC
P (Q) = FC + VC (Q)
17Q = 5,000 + 12. 50Q
17Q – 12.50Q = 5,000
4.50Q = 5,000
Q = 1,111.11
Q = 1, 112 (pies)

b. What would the profit (loss) be if 1,000 pies are made and sold in a month?

FC = Php 5,000
VC = Php 12.50
P = Php 17
Q = 1,000

Solution:

Profit (Loss) = TR – TC
Profit (Loss) = P (Q) – [FC + VC(Q) ]
= ₱17 (1,000) – [ ₱5,000 + ₱12.50 ( 1,000)]
= ₱17, 000 – ₱5,000 – ₱12, 500
Profit ( Loss) = ₱ ( 500)

c. How many pies must be sold to realize a profit of Php5,000?

FC = Php 5,000
VC = Php 12.50
P = Php 17
Target Profit = 5,000

ACTIVITY: BREAKEVEN ANALYSIS Page 1 of 5

 MBA M006 OPERATIONS MANAGEMENT

Solution:

Profit = TR – TC
Profit = P (Q) – [FC + VC(Q) ]
5,000 = 17 (Q) – [5,000 + 12.50 (Q)]
5,000 = 17Q – 5, 000 – 12.50Q
5,000 + 5,000 = 17Q – 12.50Q
10,000 = 4.50Q
2,222.22 = Q
Q = 2, 223 (pies)

d. If 2,000 can be sold, and a profit target is Php5,000, what price should be charged per pie?

FC = Php 5,000
VC = Php 12.50
Target Profit = 5,000
Q = 2,000

Solution:

Profit = TR – TC
Profit = P (Q) – [FC + VC(Q) ]
5,000 = P (2,000) – [ 5,000 + 12.50 (2,000)]
5,000 = 2,000P – 5,000 – 25,000
5,000 + 5,000 + 25,000 = 2,000P
35,000 = 2,000P
₱17. 50 = P
Selling Price per pie = ₱17. 50

2. RBF Company must select a process for its new product from among three different
alternatives. The following cost data have been gathered:

PROCESS A PROCESS B PROCESS C

Fixed Cost 20,000 50,000 80,000
Variable Cost 5/unit 2/unit 1/unit

For what volume of demand would each process be desirable? Solve and then explain you answer.

Solution:

Process A Process B Process B Process C

FC + VC = FC + VC FC + VC = FC + VC
20,000 + 5Q = 50,000 + 2Q 50,000 + 2Q = 80,000 + Q

ACTIVITY: BREAKEVEN ANALYSIS Page 2 of 5

 MBA M006 OPERATIONS MANAGEMENT

5Q – 2Q = 50,000 – 20,000 2Q – Q = 80,000 – 50,000

3Q = 30,000
Q = 30, 0 00 ( un i ts)
Q = 10, 0 00 ( un i ts)

Choose Process A if demand is less tha n or equal to 10,000 , while if demand is

more tha n 10,000 but is less than 30, 000, choose Process B. And if demand is
over 30, 000, Process C shoul d be selected .

3. JLF and RBF own Up Right Paddlers, a new startup company with the goal of designing, making,
and marketing stand-up paddle boards for streams and rivers. A new fitness craze, stand-up
paddle boards are similar to surfboards in appearance, but are used by individuals to navigate
down rivers in an upright position with a single long pole (or paddle), instead of sitting in tubes
or rafts and floating down. The boards are constructed from heavy duty raft material that is
inflatable, rather than the fiberglass material used in surfboards. Unlike surfboards that market
for Php50,000 to Php100,000 each, paddle boards are typically sold for between Php15,000
and Php40,000. Since JLF and RBF are just starting out and the demand for paddle boards on
the Northern Region has not been firmly established, they anticipate selling their product for
Php16,000 each. JLF estimates the fixed cost for equipment and space will be Php250,000, and
the material and labor costs will run Php 5,000 per unit. What volume of demand will be
necessary for JLF and RBF to break even on their new venture?

RBF, the more optimistic of the two owners of Up Right Paddlers, believes that demand for
paddle boards will exceed the computed breakeven point. He proposes spending Php1,000,000
in fixed costs to buy more automated equipment that would reduce the materials and labor cost
to Php 2,500 per board. The boards would sell for Php16,000, regardless of which
manufacturing process is chosen. Compare the two processes and determine for what level of
demand each process would be preferred. Label JLF proposal as Process A, and RBF’s proposal
as Process B.

Process A (JLF) Process B (RBF)

Fixed Cost Php 250,000 Php 1,000,000
Variable Cost per unit Php 5,000 Php 2,500
Selling Price per unit Php 16,000 Php 16,000

Solution:

Process A (JLF) Process B (RBF)

FC + VC = FC + VC
250,000 + = 1,000,000 +
5,000Q 2,500Q

ACTIVITY: BREAKEVEN ANALYSIS Page 3 of 5

 MBA M006 OPERATIONS MANAGEMENT

5,000Q – 2,500Q = 1,000,000 –

250,000
2,500Q = 750,000
Q = 300 (units)

Process A is preferred when the demand is less tha n or equal to 300 , while
Process B is preferred for a deman d grea ter than 300.

4. Use the following, to solve what is required.

TR= 30,000Q - 150Q2

TC= 4,050 + 28,200Q

Buenaflor Construction Company would like to determine the following:

a. the number of projects needed for the company to break-even.

TR = TC
30,000Q – 150Q 2 = 4,050 + 28, 200Q
-150Q + 30,000Q - 28,200Q - 4, 050
2
= 0
-150Q 2 + 1, 800Q - 4, 050 = 0

Quadra tic Equa tion :

-150Q 2 + 1, 800Q - 4, 050 = 0

where:
a = -150 b = 1,800 c = -4, 050

−𝑏 ± √𝑏 2 − 4𝑎𝑐
𝑥=
2𝑎

−1,800 ± √1,8002 − 4(−150)(−4,050)

𝑥=
2(−150)

−1,800 ± √3,240,000 − 2,430,000

𝑥=
−300

−1,800 ± √810,000
𝑥=
−300

ACTIVITY: BREAKEVEN ANALYSIS Page 4 of 5

 MBA M006 OPERATIONS MANAGEMENT

−1,800 ± 900
𝑥=
−300

−1,800 + 900 −1,800 − 900

𝑥= 𝑥=
−300 −300

𝒙 = 𝟑 (projects) 𝒙 = 𝟗 (projects)
{3, 9}

b. the number of projects needed to maximize profit.

−𝑏
𝑍 max 𝑄 =
2𝑎

−1,800
𝑍 max 𝑄 =
2(−150)

−1,800
𝑍 max 𝑄 =
−300

𝒁 𝐦𝐚𝐱 𝑸 = 𝟔 (𝒑𝒓𝒐𝒋𝒆𝒄𝒕𝒔)

c. the maximum profit.

4𝑎𝑐 − 𝑏 2
𝑍 max =
4𝑎

4(−150)(−4,050) − 1,8002
𝑍 max =
4(−150)

−2,430,000 − 3,240,000
𝑍 max =
−600

−5,670,000
𝑍 max =
−600

𝒁 𝐦𝐚𝐱 = 𝟗, 𝟒𝟓𝟎

ACTIVITY: BREAKEVEN ANALYSIS Page 5 of 5