Select one alternative Implement alternative chosen
8.
Monitor results
1.
5-1 5-10 0 Ca Capac pacity ity Plannin Planning g
Economies of Scale •
Economies of scale •
If the output rate is less than the optimal level, increasing output rate results in decreasing average unit costs
•
Diseconomies of scale •
If the output rate is more than the optimal level, increasing the output rate results in increasing average unit costs
5-1 5-11 1 Ca Capac pacity ity Plannin Planning g
Evaluating Alternatives Figure 5.4 Minimum cost & optimal operating rate are functions of size of production unit. ti
n u r
ep
g ar
s o c e
t
Small plant
Medium plant
Large plant
ve A
0
Output rate
5-1 5-12 2 Ca Capac pacity ity Plannin Planning g
Cost-Volume Relationship Relationships s Figure 5.5a
)
$( u o m A
nt
C F + C + C ) s t t = = V t ( V ( o s t o c c c c l e e l a a t b a a i T o r a v l a t a o T Fixed cost (FC)
0
Q (volume in units)
5-1 5-13 3 Ca Capac pacity ity Plannin Planning g
Cost-Volume Relationships Figure 5.5b
)
$( t
un o m A
0
e u n e v e r t a l t l T o
Q (volume in units)
5-1 5-14 4 Ca Capac pacity ity Plannin Planning g
Cost-Volume Relationship Relationships s Figure 5.5c
)
$( t
un o m A
0
e u n t i t e f v o e P r r t a l o s t o c c T l a a t T o
BEP units Q (volume in units)
5-1 5-15 5 Ca Capac pacity ity Plannin Planning g
Break-Even Problem with Step Fixed Costs Figure 5.6a
T C T = = C + V F C +
C T = = C + V + C F
= = C V + + F C T C
3 machines
2 machines
1 machine Quantity Step fixed costs and variable costs.
5-1 5-16 6 Ca Capac pacity ity Plannin Planning g
Break-Even Problem with Step Fixed Costs Figure 5.6b
$
BEP
3
TC
BEP2
TC 3
TC R T
2 1
Quantity Multiple break-even points
5-1 5-17 7 Ca Capac pacity ity Plannin Planning g
Assumptions of Cost-Volume Analysis 1. 2. 3.
4. 5. 6.
One product is involved Everything produced can be sold Variable cost per unit is the same regardless of volume Fixed costs do not change with volume Revenue per unit constant with volume Revenue per unit exceeds average cost per unit