Arab Academy for Science and Technology

Industrial and Management Engineering Department

Course: NE-364 Engineering Economy

Sheet #1
Cost Concepts and Design Economics

Breakeven Analysis

1. (In Section) A plant has a capacity of 4,100 hydraulic pumps per month. The fixed cost is $504,000
per month. The variable cost is $166 per pump, and the sales price is $328 per pump. (Assume that
sales equal output volume.) What is the breakeven point in number of pumps per month? What
percentage reduction will occur in the breakeven point if fixed costs are reduced by 18% and unit
variable costs by 6%?

2. (In Section) An amusement park faces large fixed costs of $500,000 per month and low average
variable costs of $10 per visitor. It charges all visitors a flat entry fee of $50 for unlimited rides.

a) What is the breakeven point for the park?

b) The park currently has 42,000 visitors a month and proposes to raise its entry fee to $60 per
person in order to cover the cost of a new Harry Potter-themed ride. What is the new
breakeven point if the variable cost increases to $15 per visitor?
c) If the park now receives 25,000 visitors a month because of the increase in entrance fee in
Part (b), will the park still be profitable?

3. (In Section) A tennis racquet manufacturer is negotiating a lease on land to build a manufacturing
plant. The price charged will be determined by p=$450 – (0.1)D per tennis racquet. The
manufacturer faces variable costs of $25 per tennis racquet .Fixed costs of manufacturing are
currently $25,000, in addition to the value of the lease being negotiated.

a) For this situation, determine the monthly sales volume for this product that maximizes the
total revenue.
b) How high can the lease be in order for the firm to make a positive profit?

4. (Assignment) A company produces circuit boards used to update outdated computer equipments.
The fixed cost is $ 42,000 per month, and the variable cost is $53 per circuit board. The selling price
per unit is
p = $150 – 0.02D. Maximum output of the plant is 4,000 units per month.

a) Determine optimum demand for this product.

b) What is the maximum profit per month?
c) At what volumes does breakeven occur?
d) What is the company's range of profitable demand?
5. (Assignment) Company has established that the relationship between the sales price for one of
its products and the quantity sold per month is approximately D = 780 – 10p units. (D is the demand
or quantity sold per month, and p is the price per dollars.) The fixed cost is $800 per month, and the
variable cost is $30 per unit produced. What number of units, D*, should be produced per month and
be sold to maximum net profit? Also, determine D'1 and D'2.

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