PROJECT ON OPERATIONS MGT.

(Break Even Analysis)

Problem 1:
Godavari Electricals Ltd wanted to setup a ne plant for manufacturing

industrial heaters. The management of Godavari Electricals identified A,B and C as the potential areas to setup the plant. The fixed costs per year and the variable costs per heater at each of the three locations are given below : LOCATION FIXED COST/YEAR VARIABLE COST/UNIT

A B
C

200000 250000
300000

325 285
265

The product is expected to be sold at Rs 1050 and the company hopes to sell 600 industrial heaters per year. Calculate the likely profit at each location and determine the most profitable location for the company.

Solution 1 :
Total cost at A Total cost at B

Total cost at C

= 2,00,000 + (325 x 600) = 3,95,000 RS = 2,50,000 + (285 x 600) = 4,21,000 Rs = 3,00,000 + (265 x 600) = 4,59,000 Rs

 Total Revenue of the firm

= 1050 x 600 = Rs 6,30,000 Profit at A = 6,30,000 3,95,000 = 2,35,000 Profit at B = 6,30,000 4,21,000 = 2,09,000 Profit at C = 6,30,000 4,59,000 =1,71,000 So it is clear that A is the most profitable location to setup the new plant for producing 600 units/year.

Problem 2:
Travis and Jeff own an adventure company called

Whitewater Rafting. Due to quality and availability problems, the two entrepreneurs have decided to produce their own rubber rafts. The initial investment in plant and equipment is estimated to be $2,000. labor and material cost is approximately $5 per raft. If the rafts can be sold at a price of $10 each, what volume of demand would be necessary to break even?

Solution 2:
Fixed Cost

= Cf = $ 2000 Variable Cost = Cv = $5 Price = p = $ 10 per raft then Break even point is V = Cf /(p Cv) = 2000/(10-5) = 400 rafts

dollars

Total cost line

200 0 100 0 400

Total revenue line

units

Break even point