1.

Use graphical procedure

70,000,000
BEP Total revenue Total cost
0 0 10,000,000 60,000,000

5,000 8,500,000 16,500,000 50,000,000

10,000 17,000,000 23,000,000
15,000 25,500,000 29,500,000 40,000,000

20,000 34,000,000 36,000,000 30,000,000

25,000 42,500,000 42,500,000
30,000 51,000,000 49,000,000 20,000,000 Loss

35,000 59,500,000 55,500,000 10,000,000

0
5,000 10,000 15,000 20,0

Total revenue

2. Use algebraic procedure

Decision variable:
Q = Number of watches to produce

Cost:
Fixed cost = 10.000.000 (If Q > 0)
Variable cost = 1.300 Q

Total cost =
0, if Q = 0
10.000.000 + 1.300Q, if Q>0

Profit:
Profit = Total revenue - Total cost
Profit = 0, if Q = 0
Profit = 1.700Q - (10.000.000 + 1.300Q) = 400Q - 10.000.000 , if Q>0

Profit = 0 <=> Q = 2500

3. Mathematical model

Q= Number of watches to produce

 The number of watches produced cannot be less than 0. Therefore,
Q >= 0

is one of the constraints for the complete mathematical model. Another restriction on the value of
Q is that it should not exceed the number of watches that can be sold. A sales forecast has not yet
been obtained, so let the symbol s represent this currently unknown value.

s = Sales forecast (not yet available) of the number of grandfather watches that can be sold.
Consequently,
Q≤s
is another constraint, where s is a parameter of the model whose value has not yet been chosen.

The final factor that should be made explicit in the model is the fact that management’s objective
is to make the decision that maximizes the company’s profit from this new product. Therefore, the
complete mathematical model for this problem is to find the value of the decision variable Q so as to

Maximize profit =
0, if Q = 0
400Q - 10.000.000, if Q>0
Subject to
0≤Q≤s

Solution for Mathematical Model

Break-even point = Fixed cost / (Unit revenue - Variable cost) = 10.000.000 / (1.700 - 1.300) = 25.0

If s ≤ 25.000, then set Q = 0

If s > 25.000, then set Q = s

Therefore, the company should introduce the product and produce the number of units that
can be sold only if this production and sales volume exceeds the break-even point.

4. Determine the production quantity and the estimated total profit ( Sales forecast =

Data Results
Unit revenue 1,700 Total revenue 51,000,000
Fixed cost 10,000,000 Total fixed cost 10,000,000
Variable cost 1,300 Total variable cost 39,000,000
Sales forecast 30,000 Profit (Loss) 2,000,000
Production quantity 30,000 Break-even point 25,000

5. Management does not want to consider producing more than 20000

Data Results
Unit revenue 1,700 Total revenue 34,000,000
Fixed cost 10,000,000 Total fixed cost 10,000,000
Variable cost 1,300 Total variable cost 26,000,000
Sales forecast 30,000 Profit (Loss) -2,000,000

Production quantity 20,000 Break-even point 25,000

Q ≤ 20.000 < Break-even point (25.000)

Profit = - 2,000,000 (LOSS)

The production should be

25.000 ≤ Q ≤ 30.000

So Q should be 30.000
Profit = 2.000.000
 Total revenue = 1.700Q Profit

Total cost =
10.000.000 +
1.300Q

Fixed cost = 10.000.000 if Q >

0
Break-even point = 25.000

10,000 15,000 20,000 25,000 30,000 35,000

Total revenue Total cost

 riction on the value of
forecast has not yet

that can be sold.

not yet been chosen.

anagement’s objective
duct. Therefore, the
ion variable Q so as to

/ (1.700 - 1.300) = 25.0

mber of units that

oint.

rofit ( Sales forecast = 30,000)

re than 20000
 a. Buying option

Data
Unit revenue 2,000 Total revenue
R&D cost (Fixed cost) 5,000,000 Total fixed cost
Marginal cost 1,250 Total marginal cost
Sales forecast 30,000 Profit

b. Making option

Data
Unit revenue 2,000 Total revenue
Fixed cost 10,000,000 Total fixed cost
Marginal cost 1,000 Total marginal cost
Sales forecast 30,000 Profit

c. Compare these two options

Compare total costs of 2 options

Buy option Make option
Fixed cost 5,000,000 Fixed cost
Marginal cost 1,250 Marginal cost
Sales volume 30,000 Sales volume

Total cost: 42,500,000 Total cost:

=> Chose making option because of lower total cost and higher profit
To mazimize the profit Q = 30.000

d. Use a graphical procedure

Total cost (buying Total cost (making

BEP
option) option) 45,000,000

0 5,000,000 10,000,000 40,000,000

5,000 11,250,000 15,000,000 35,000,000

10,000 17,500,000 20,000,000 30,000,000
15,000 23,750,000 25,000,000
25,000,000
20,000 30,000,000 30,000,000
25,000 36,250,000 35,000,000 20,000,000
30,000 42,500,000 40,000,000 15,000,000

10,000,000

5,000,000

0
5,000 10,000 15,0
 20,000,000

15,000,000

10,000,000

5,000,000

0
5,000 10,000 15,0

Total cost (buying option)

e. Use an algebraic procedure

Q= Break-even point

Buying option:
Fixed cost = 5.000.000
Marginal cost = 1.250
Total cost = 5.000.000 + 1.250Q

Making option:
Fixed cost = 10.000.000
Marginal cost = 1.000
Total cost = 10.000.000 + 1.000Q

Break-even point:
5.000.000 + 1.250Q = 10.000.000 + 1.000Q
Q = 20.000

f. Use a spreadsheet model

Buying option Making option

Fixed cost 5,000,000 Fixed cost
Marginal cost 1,250 Marginal cost

Break-even point 20,000

CONCLUSION
The break-even point of 2 options is 20.000 watches (Profit =0)

If company's sales forecast is less than 20.000 watches, it should choss the buying option because total
cost of buying option < total cost of making option in this case.

If company's sales forecast is more than 20.000 watches, it should chose the making option because
total cost of making option < total cost of buying option, in this case.
 Results
60,000,000
5,000,000
37,500,000
17,500,000

Results
60,000,000
10,000,000
30,000,000
20,000,000

Make option
10,000,000
1,000
30,000

40,000,000

,000

,000

,000

,000

,000

,000

,000

,000
Break-even point = 20.000
,000

0
5,000 10,000 15,000 20,000 25,000 30,000
,000

,000

,000
Break-even point = 20.000
,000

0
5,000 10,000 15,000 20,000 25,000 30,000

Total cost (buying option) Total cost (making option)

Making option
10,000,000
1,000

e buying option because total

he making option because