ArtsAutosBooksBusinessEducationEntertainmentFamilyFashionFoodGamesGenderHealthHolidaysHomeHubPagesPersonal FinancePetsPoliticsReligionSportsTechnologyTravel

How to Complete a Break-Even Analysis in Production: Between Processes

Updated on December 11, 2018
Joshua Crowder profile image

Joshua has work experience in aerospace/aluminum manufacturing & distribution. He received his BBA in accounting from Kent State University.

Breakeven Point

Finding the breakeven point of a process can aid in understanding constraints, costs and production planning overall. Breakeven analysis can be used in various business applications making it worth learning.
Finding the breakeven point of a process can aid in understanding constraints, costs and production planning overall. Breakeven analysis can be used in various business applications making it worth learning.

What is Breakeven Analysis?

Breakeven analysis calculates the point at which revenues equal expenses in many applications. For process analysis, I will be using breakeven analysis to compare processes in a production setting. In this sense we can compare costs of different processes to figure out what quantities need to be produced to make that process worth putting in place. Costs involved in a process must first be separate into variable and fixed costs. Fixed costs do not change with the quantity of output and will not zero when production is zero. For example, we stop producing the fixed cost remains. Fixed cost examples include rent, insurance and loan payments. In the example used here fixed cost will be the cost of equipment. Variable costs will change with the increase or decrease of output. Variable costs can be labor rates, shipping cost, direct materials cost and plenty more. For simplicity, variable cost will be the labor cost per hour and is transferred into a cost per unit of product.

Breakeven Analysis Example

This example examines different processes within a pastry company. Suppose that there are different ways to produce pastries. The process 1 involves a worker cutting pastries by hand with a tool without the assistance of a machine. The worker can cut out 120 pastries per hour while being paid a rate of $12 per hour. Another process used is a machine called the Demag 2000. This machine has a fixed cost of $10,000 and can cut out 600 pastries per hour. The third process involves another machine called the Demag 3000. This equipment has a fixed cost of $15,000 and can cut out 900 pastries per hour. If the bakery always meets its target of 200,000 pastries per year, let find out how long it will take to recoup costs associated with using a machine. Labor costs per pastry equals the pastry cutter's hourly wage rate divided by the output of that process.

Step 1

The first thing we want to do is find intersect process 1 and process 2. To do so we must multiply each variable cost by Q, add fixed costs to each (process 1 has no cost since there is not capital investment), then let them equal each other. The equation is shown below:

p1=p2

$.1 x Q = $10,000 + $.02 x Q

$.1Q - $.02Q = $10,000

$.08Q = $10,000

Q =125,000

This breakeven point (BEP) shows the point at which both processes will be creating the same output at the same cost. So, if the company produces quantity a of 200,000 per year like they plan, then it will take the company 7.5 months 125,000/ 200,000 to recover the costs of purchasing a new machine (process 2). When comparing process 1 and 2 it is better to use process 1 when under 125,000 pastries need to be produced and process 2 if more than 125,000 pastries need to be produced.


Step 2

Next, we can solve the breakeven point for process 2.

p2=p3

$10,000 + $.02 X Q = $15,000 + $.0133 x Q

$10,000 + $.02Q = $15,000 + $.0133333Q

$.006667Q = $15,000

$.006667Q = $5,000

Q=749,963 or about 750,000 pastries

When comparing the two automated processes we see that process is more useful with at if 750,000 pastries are produced.

Create a Breakeven Graph

When completing a breakeven analysis is always nice to have a chart. A chart can be made easily in Microsoft Excel. While in excel make four columns. One for your X-Axis (Quantity) and three for your Y-Axes (Cost). For the quantity column start at zero and add 100,000, 200,000, 300,000... until you reach 1 million. Now for p1, plug 0 into the equation $.10 X Q you will get zero. For p2 when you plug in o your get 10,000 ($10,000 +$.02 x Q) When plugging in for p3 you get 15,000 ($15,000 + $.0066 x Q). Continue to calculate for p1, p2 and p3 while plug in each 100,000 for Q. (hint: in excel if you complete a few rows you can highlight those rows and use the fill handle to complete the table). You should have a table like the one shown below.

Creating The Graph

To create the graph, you must select all the data in the table click on the insert tab, then click on the scattered line selection that I circled in the photo. After creating the graph, I suggest adding a title and reducing the axis maximum quantity to show a better representation of the breakeven points. If you would like a copy of the table or graph you can download a link to the spreadsheet here.

Breakeven Analysis Graphed

References

Boyer, K. & Verma, R. (2010). Operations & supply chain management for the 21st century. Mason, OH: South-Western.

© 2018 Joshua Crowder

Comments

    0 of 8192 characters used
    Post Comment

    No comments yet.

    working

    This website uses cookies

    As a user in the EEA, your approval is needed on a few things. To provide a better website experience, hubpages.com uses cookies (and other similar technologies) and may collect, process, and share personal data. Please choose which areas of our service you consent to our doing so.

    For more information on managing or withdrawing consents and how we handle data, visit our Privacy Policy at: https://hubpages.com/privacy-policy#gdpr

    Show Details
    Necessary
    HubPages Device IDThis is used to identify particular browsers or devices when the access the service, and is used for security reasons.
    LoginThis is necessary to sign in to the HubPages Service.
    Google RecaptchaThis is used to prevent bots and spam. (Privacy Policy)
    AkismetThis is used to detect comment spam. (Privacy Policy)
    HubPages Google AnalyticsThis is used to provide data on traffic to our website, all personally identifyable data is anonymized. (Privacy Policy)
    HubPages Traffic PixelThis is used to collect data on traffic to articles and other pages on our site. Unless you are signed in to a HubPages account, all personally identifiable information is anonymized.
    Amazon Web ServicesThis is a cloud services platform that we used to host our service. (Privacy Policy)
    CloudflareThis is a cloud CDN service that we use to efficiently deliver files required for our service to operate such as javascript, cascading style sheets, images, and videos. (Privacy Policy)
    Google Hosted LibrariesJavascript software libraries such as jQuery are loaded at endpoints on the googleapis.com or gstatic.com domains, for performance and efficiency reasons. (Privacy Policy)
    Features
    Google Custom SearchThis is feature allows you to search the site. (Privacy Policy)
    Google MapsSome articles have Google Maps embedded in them. (Privacy Policy)
    Google ChartsThis is used to display charts and graphs on articles and the author center. (Privacy Policy)
    Google AdSense Host APIThis service allows you to sign up for or associate a Google AdSense account with HubPages, so that you can earn money from ads on your articles. No data is shared unless you engage with this feature. (Privacy Policy)
    Google YouTubeSome articles have YouTube videos embedded in them. (Privacy Policy)
    VimeoSome articles have Vimeo videos embedded in them. (Privacy Policy)
    PaypalThis is used for a registered author who enrolls in the HubPages Earnings program and requests to be paid via PayPal. No data is shared with Paypal unless you engage with this feature. (Privacy Policy)
    Facebook LoginYou can use this to streamline signing up for, or signing in to your Hubpages account. No data is shared with Facebook unless you engage with this feature. (Privacy Policy)
    MavenThis supports the Maven widget and search functionality. (Privacy Policy)
    Marketing
    Google AdSenseThis is an ad network. (Privacy Policy)
    Google DoubleClickGoogle provides ad serving technology and runs an ad network. (Privacy Policy)
    Index ExchangeThis is an ad network. (Privacy Policy)
    SovrnThis is an ad network. (Privacy Policy)
    Facebook AdsThis is an ad network. (Privacy Policy)
    Amazon Unified Ad MarketplaceThis is an ad network. (Privacy Policy)
    AppNexusThis is an ad network. (Privacy Policy)
    OpenxThis is an ad network. (Privacy Policy)
    Rubicon ProjectThis is an ad network. (Privacy Policy)
    TripleLiftThis is an ad network. (Privacy Policy)
    Say MediaWe partner with Say Media to deliver ad campaigns on our sites. (Privacy Policy)
    Remarketing PixelsWe may use remarketing pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to advertise the HubPages Service to people that have visited our sites.
    Conversion Tracking PixelsWe may use conversion tracking pixels from advertising networks such as Google AdWords, Bing Ads, and Facebook in order to identify when an advertisement has successfully resulted in the desired action, such as signing up for the HubPages Service or publishing an article on the HubPages Service.
    Statistics
    Author Google AnalyticsThis is used to provide traffic data and reports to the authors of articles on the HubPages Service. (Privacy Policy)
    ComscoreComScore is a media measurement and analytics company providing marketing data and analytics to enterprises, media and advertising agencies, and publishers. Non-consent will result in ComScore only processing obfuscated personal data. (Privacy Policy)
    Amazon Tracking PixelSome articles display amazon products as part of the Amazon Affiliate program, this pixel provides traffic statistics for those products (Privacy Policy)