TAILIEUCHUNG - Lecture Engineering economics - Chapter 8: Breakeven analysis

Upon completion of this chapter you should understand: Calculating linear breakeven points; calculating nonlinear breakeven points; effect of changes in costs and revenue; strategies associated with capacity limits, expansion and profits; isocosts and breakeven between products;. | Chapter 8 -Unit 1 Breakeven Analysis IET 350 Engineering Economics 1 Learning Objectives - Chapter 8 Upon completion of this chapter you should understand Calculating linear breakeven points. Calculating nonlinear breakeven points. Effect of changes in costs and revenue. Strategies associated with capacity limits expansion and profits. Isocosts and breakeven between products. Legislation and public policy as it related to breakeven. 2 Learning Objectives - Unit 1 Upon completion of this unit you should understand Calculating linear breakeven points. Calculating nonlinear breakeven points. Effect of changes in costs and revenue. Strategies associated with capacity limits expansion and profits. Isocosts and breakeven between products. Legislation and public policy as it related to breakeven. 1 Introduction Breakeven analysis is a tool that can be used to Determine the volume of a product or service that must be produced to cover all costs and generate a profit. Choose between two or more alternatives. Determine make vs. buy decisions. Assist in managing asset-intensive and labor intensive organizations. Breakeven analysis is also know as cost-volume-profit analysis. 4 1 Linear Breakeven Linear breakeven can be illustrated on the breakeven graph. Quantity is plotted on the independent horizontal axis. Cash flow is plotted on the dependent vertical axis. Linear Breakeven Linear breakeven assumes that total revenue variable cost and fixed cost can be approximated by straight lines. Total revenue constant unit. Fixed cost single cost amount. Variable cost constant unit. Total cost fixed variable cost 6 2 Fixed Costs Fixed costs FC do not change with change in output. We assume that even if quantity 0 fixed costs will occur. Since fixed costs are independent of quantity they are plotted as a horizontal line. Examples of fixed costs Rent Management salaries Depreciation Property taxes Building maintenance Advertising Engineering salaries Variable Costs Variable costs VC .

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