ASSIGNMENT 17.3 BREAK-EVEN POINT

QUESTION

The type of tooling to make for a manufacturing process depends on the expected total quantity of parts. Tooling made from standard components and less wear-resistant materials (soft tooling) can be made more quickly and cheaply than conventional tooling made from hardened steel (hard tooling). Use the concept of break-even point to determine the production quantity for which soft tooling can be justified. 

The following cost data applies:

                                                Soft tooling                                     Hard tooling

Tool           Tooling cost                     C_S $600                                                C_H $7500

Setu         Setup cost                         S_S $100                                                  S_H $60

Unit         Unit Part cost                  C_PS $3.40                                             C_PH $0.80

 ANSWER

 

The break-even point is the sales or production volume at which sales and costs balance.

C_H + (Q_BEP/b) S_H + C_PH Q_BEP = C_S + (Q_BEP/b)  S_S+ C_PS Q_BEP

Break-even point, 

Q_BEP = C_H - C_S / [(S_S - S_H}/b) + (C_{PS -} C_PH)]

         = 7500 – 600/ [((100 – 60)/500) + (3.4 – 0.8)]

         = 2574.63

         = 2575 units