Cost Concepts and Design Economics 1

IE-411
Engineering Economy

Breakeven Point Relationships

Industrial Engineering Department
 Objectives

• Problem Solution
• Assignment

Cost Concepts and Design Economics 3

 Problem 1

A lash adjuster keeps pressure constant on

engine valves, thereby increasing fuel efficiency
in automobile engines. The relationship between
price (p) and monthly demand (D) for lash
adjusters made by the Wicks Company is given
by this equation: D = (2,000 − p)/0.10. What is
the demand () when total revenue is maximized?
What important data are needed if maximum
profit is desired?

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 Solution

(a) D = (2,000 − p)/0.10

p = 2000 - 0.10 D
Total Revenue = p . D
TR = (2000 – 0.10 D) D
TR = 2000D – 0.10 D2
For maximum revenue,

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 Solution

2000 – 2(0.10) D = 0
2000 - 0.20 D = 0
= 10000 units per month

To determine maximum profit, we need fixed and

variable cost in addition to the given data

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 Problem 2

A large company in the communication and

publishing industry has quantified the
relationship between the price of one of its
products and the demand for this product as
Price = 150 − 0.01 × Demand for an annual
printing of this particular product. The fixed costs
per year = $50,000 and the variable cost per
unit=$40. What is the maximum profit that can
be achieved if the maximum expected demand
is 6,000 units per year? What is the unit price at
this point of optimal demand?

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 Solution

(a) p = 150 – 0.01 D

Cf = $ 50000
cv = $ 40 / unit
a = 150, b = 0.01
Condition 1: a - cv = 150 – 40 $110 > 0
D* =
D* =
D* = 5500 units / year

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 Solution

Condition 2 :
Profit = Total Revenue – Total Cost
Profit = p . D – (Cf + cv . D)
Profit = (150 – 0.01 D) D – 50000 – (40) D
Profit = 5500 (150 – 0.01 (5500)) – 50000 – 40(5500)
Profit = $ 252500

(b) p = 150 - 0.01(5500)

p = $95 / unit

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 Alternative Solution

Profit (P) = Total Revenue – Total Cost

P = p . D – (Cf + cv . D)
P = (150 – 0.01 D) D – (5000 + 40 D)
P = 150D – 0.01D2 – 5000 - 40D
P = 110D - 0.01D2 – 5000
dP/dD = 110 – 0.02D = 0
110 = 0.02 D
D* = 5500 units / year

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 Problem 3

The annual fixed costs for a plant are $100,000,

and the variable costs are $140,000 at 70%
utilization of available capacity, with net sales of
$280,000. What is the breakeven point in units
of production if the selling price per unit is $40?

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 Solution

CF = $100000/year, CV = $140000/year
Sales = $280,000/year, p = $40/unit
Annual Sales (units) = $280,000/$40
= 7,000 units/year
Cv = cv . D
cv = $140,000/7,000 = $20/unit
D′ =
D′ =
D′ = 5000 units /year

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 Assignment
Stan needs 15 gallons of gasoline to top off his automobile’s gas tank. If he
drives an extra eight miles (round trip) to a gas station on the outskirts of
town, Stan can save $0.10 per gallon on the price of gasoline. Suppose
gasoline costs $3.90 per gallon and Stan’s car gets 25 mpg for in-town
driving. Judge that should Stan make the trip to get less expensive
gasoline? Each mile that Stan drives creates one pound of carbon dioxide.
Each pound of CO2 has a cost impact of $0.02 on the environment.
Determine other factors (cost and otherwise) should Stan consider in his
decision making?

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 Assignment

A large wood products company is negotiating a

contract to sell plywood overseas. The fixed cost that
can be allocated to the production of plywood is
$800,000 per month. The variable cost per thousand
board feet is $155.50. The price charged will be
determined by p = $600 − (0.05)D per 1,000 board
feet.
a. For this situation, determine the optimal monthly
sales volume for this product and calculate the profit
(or loss) at the optimal volume.
b. Compute the domain of profitable demand
during a month?

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 Thank You

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