Break Even Analysis
Workplace, International is re-evaluating the design, cost and profitability of its line of office accessories. Currently, the items are constructed of metal-based parts for durable and consistent performance. At the time of the initial process decision, the metal drawing process was also the most economical. Management now suspects that the cost advantage enjoyed by metal parts is highly dependent on the volume of parts produced. To confirm their suspicions, management would like you to compare the break-even volume for one of its products, the 3-hole punch, when fabricated from metal versus plastic. What decision can be made based on the individual break-even points of each process?

Metal Drawing Process Plastic Injection Molding
Fixed cost $ 50,000 $100,000
Variable cost $ 5 per unit $ 2 per unit
Selling price $10 per unit $10 per unit

Process Selection
Referring to the previous example, Workplace management wants more specific information regarding the volume at which the 3-hole punch should be constructed from metal parts or from plastic parts. Management is also considering subcontracting out the production of the parts for $8 per unit. Which alternative would you recommend?

Question 1: What decision can be made based on the individual break-even points of each process?
Solution
Step 1 : Compute break-even for each process.
Break-even for metal drawing process is.
V = Cf P - Cv = 50,000 10 – 5 = 10 000 unit #
Break-even for Plastic Injection Molding is.
V = Cf
P - Cv = 100,000 10 – 2 = 12 500 unit #
Step 2 : Compare Break-even for each process.
From comparison to the calculation above, the management should choose a metal drawing process because break-even unit and total cost for metal drawing process (10 000 unit = $ 100 000) is below than plastic injection process (12 500 unit = $ 125 000).
Total Cost for Break-Even $125 000
Total Cost for Break-Even $125 000
Plastic Injection Molding
Plastic Injection Molding
Metal Drawing Process
Metal Drawing Process
Dollars
12 500
Break-Even Point
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Total Cost Line
Total Revenue Line
Dollars
12 500
Break-Even Point
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Total Cost Line
Total Revenue Line
Step 3 : Build Break-even graph for each process.
Total Cost for Break-Even $100 000
Total Cost for Break-Even $100 000
Dollars
10 000
Break-Even Point
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Total Cost Line
Total Revenue Line
Dollars
10 000
Break-Even Point
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Total Cost Line
Total Revenue Line

Question 2: Management is also considering subcontracting out the production of the parts for $8 per unit. Which alternative would you recommend?
Solution
Step 1: Compare the two processes between Metal Drawing Process and Plastic Injection Molding then determine for what level of demand each process would be preferred.
Plastic Injection Molding
Plastic Injection Molding
Metal Drawing Process
Metal Drawing Process

50 000 + 5V = 100 000 + 2V 5V - 2V = 100 000 – 50 000 3V = 50 000 V = 16 667#
If demand/production is less than or equal to 16 667, the alternative with the lowest fixed cost, Metal Drawing Process, should be chosen. If demand/production is greater than or equal to 16 667, the alternative with the lowest variable cost, Plastic Injection Molding, is preferred.

Total Cost for Break-Even $133 335
Dollars
16 667
Point of Indifferent
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Plastic Injection Molding
Metal Drawing Process

Choose
Metal Drawing Process
Choose
Plastic Injection Molding Process
Total Cost for Break-Even $133 335
Dollars
16 667
Point of Indifferent
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Plastic Injection Molding
Metal Drawing Process

Choose
Metal Drawing Process
Choose
Plastic Injection Molding Process

Step 2: Compare the two processes between Metal Drawing Process and Outsourcing then determine for what level of demand each process would be preferred.

Outsourcing
Outsourcing
Metal Drawing Process
Metal Drawing Process

50 000 + 5V = 8V 8V - 5V = 50 000 V = 50 000 3 V = 16 667#

If demand/production is less than or equal to 16 667, the alternative with the lowest/zero fixed cost, Outsourcing, should be chosen. If demand/production is greater than or equal to 16 667, the alternative with the lowest variable cost, Metal Drawing Process, is preferred.

Total Cost for Break-Even $133 335
Dollars
16 667
Point of Indifferent
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Outsourcing
Metal Drawing Process
Choose
Metal Drawing Process

Choose
Outsourcing
Total Cost for Break-Even $133 335
Dollars
16 667
Point of Indifferent
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Outsourcing
Metal Drawing Process
Choose
Metal Drawing Process

Choose
Outsourcing

Step 3: From the calculation above, the management consider that 16 557 unit of demand/production is the break-even point for the whole three processes. Compare the fix cost and the variables cost three processes between Metal Drawing Process, Outsourcing and Plastic Injection Molding then determine for what level of demand each process would be preferred.

Solution

| Metal Drawing Process | Plastic Injection Molding | Outsourcing | Fix Cost | 50 000 | 100 000 | 0 | Variables Cost | 5 | 2 | 8 |

Conclusion
From the information that given above about fix cost and variables cost for the whole three processes, the decision should made by management is, If demand/production is less than or equal to 16 667, the alternative with the lowest/zero fixed cost, Outsourcing, should be chosen. If demand/production is greater than or equal to 16 667, the alternative with the lowest variable cost, Plastic Injection Molding, is preferred.

Total Cost for Break-Even $133 335
Dollars
16 667
Point of Indifferent
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Outsourcing
Plastic Injection Molding
Choose
Plastic Injection Molding Process

Choose
Outsourcing
Total Cost for Break-Even $133 335
Dollars
16 667
Point of Indifferent
Unit
25 000
100 000
75 000
50 000
150 000
175 000
200 000
125 000
Outsourcing
Plastic Injection Molding
Choose
Plastic Injection Molding Process

Choose
Outsourcing