IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1

UNIT-1 INTRODUCTION
PART –A
1. Define the terms; (i) Production; (ii) Production planning; (iii) PPC.
 Production: It is the sequence of operations which transform the given materials in to
desired products.
 Production planning:It is defined as the determination, acquisition and arrangement of all
facilities necessary for further production of products.
 PPC: It is defined as the direction and coordination of the organization’s materials and
physical facilities towards the attainment of pre-specified goals in the most efficient way.
 PPC = Production Planning +Production Control

2. What are the objectives of production planning and control? (Apr-2015, Nov-2017, Apr-2017)
 Systematic planning of production activities to achieve the highest efficiency in
production of goods/services.
 To organize the production facilities like machines, men, etc., to achieve stated
production objectives With respect to quantity and quality time cost.
 Optimum scheduling of resources.
 To conform to delivery commitments.
 Materials planning and control.

3. Define the term production control and mention how it forms the basis for other control?
(Apr-2014, Nov-2016)
 Production control through control mechanism, tries to take corrective action to match the
planned and actual production.
 The production control involves implementation of production plans by coordinating
different activities. It seeks to ensure that production operation and actual performance
occur according to planned operations and performance.

4. List the function of production control. (Nov-2014)

 To implement the production plans into effect by issuing the necessary orders to the right
person through the proper channels.
 To co-ordinate, monitor and provide feed-back to the production management.
 The results of the production activities, analysing and interpreting their corrective action if
necessary.
 To provide the optimum utilization of all resources.
 To achieve the board objectives of low cost of production and reliable customer service

5. What are the phases and main functions of PPC?

 Phasesof PPC: i. Preplanning Phase ii. Planning Phase iii. Control phase
 functions of PPC (1) Materials planning; (2) Methods Planning: (3)Facility planning;
(4)Process Planning; (5) Estimating Planning; (6) Scheduling and
Loading;(7) Dispatching; (8) Expediting (Follow-up); (9) Inspection
and testing

6. What are the objectives of production planning? (Nov-2015)

 To predetermine from sales forecasts and engineering information, the kind of materials,
machines, tools, buildings, methods and labour necessary in the proper quantities and
qualities and quantities, when and as required, to produce the desired goods in the most
economical manner.
 To make all preparations for manufacturing necessary to reach the production goals
established in the production budget and master schedule and by the fluctuating demand of
the customers.

SRI VIDYA COLLEGE OF ENGG&TECH Page 1

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1

7. What is meant by breakeven point and mention its significance? (Apr-2014, 2017, Nov-2016)
 Break-even point refers to the level of sales at which the sale income equal the total costs. It
is a point at which profit is zero. It is also known as “no-profit no-loss point”.
 If a firm produces and sells above the break-even point, it makes profit. In case it produces
and sells less than the break-even point, the firm would suffer loss.

8. What is break even analysis? (April/May 2015, Nov-2015)

 Break-even analysis, also known as cost-volume-profit analysis, is the study of inter-
relationship among a firm’s sales, costs and operating profit at various levels of output.
 Its reveals the effect of fixed costs, variable costs, prices, sales mixes, etc., on the profitability
of a firm.

9. Brief about the economics of a new design. (Nov-2014)

 When the launching of a new design or model is considered, a careful analysis of the
economics of the proposed project has to be undertaken.
 Samuel Eilon has proposed a model, which is based on the break-even analysis, to determine
whether the additional investment is desirable or not?; whether the new product will be
profitable or not?

10. List the various types of production. Give example. (Apr-2016, Nov-2017)
(i) Job shop production. Example: Ship
(ii) Batch production. Example: Drugs, Clothes, Paints
(iii) Mass production, Example: Electronics, Electricals, Automobiles.
(iv) Process production. Example: Textiles, Cement, chemicals industries.

11. What is meant by Standardization and Simplification (Apr-2016)

 Standardization is a process of defining and applying the conditions necessary to ensure
that given range of requirements can normally be met with a minimum of variety and in a
reproducible and economic manner on the basis of the best current techniques.
 Simplification is a process of reducing types of products within a definite range.

12. Define – Durability and Dependability

 Durability refers to the length of the active life of the product under given working condition.
 Dependability refers to the reliability with which the product serves its intended function.

13. What is product Design? What are the various aspect of product?
 Design is the conversion of knowledge and requirement into a form, convenient and suitable
for use of manufacture.
 a) Functional aspect b) Operational aspect c) Durability and Dependability d) Aesthetic
aspect

14. What is margin of safety and angle of incidence?

 Margin of safety - It is the difference between the existing level of output and the level of
output at BEP.
 Angle of incidence- The angle at which sales revenue line cuts the total cost line.

15. Define – Contribution

 The difference between selling price and variable cost per unit is known as contribution or
contribution margin
Contribution =Selling price-Variable cost.

SRI VIDYA COLLEGE OF ENGG&TECH Page 2

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1
16. A manufacturer sells an item for Rs.13 per unit. He incurs a fixed cost of Rs.60, 000 and a
variable cost of Rs.8 unit. Find the break even production quantity and also the number of
units to be produced to get a profit of Rs.12, 000. (Nov-2014)
Given data: SP=Rs.13; FC=Rs.60, 000; VC=Rs.8
FC 60000
Break even production quantity (BEP) BEP    12, 000units
SP  VC 13  8
Number of units to be produced to get a profit of Rs.12,000
FC  Pr ofit 60000  12000
Sales volume    14, 400units
SP  VC 13  8
17. Contrast product simplification with product diversification.
 Product simplification is the process of reducing the variety of products manufactured.
 Product diversification involves adding new products or line of products to achieve a
balanced product range.

18. What do you mean by specialization? State its advantages.

 Specialization is the process whereby particular firms concentrate on the manufacture of a
limited number of products or types of products.
 Advantages: (i) Better utilization; (ii) Higher productivity; (iii) Greater efficiency
19. Differentiate between routing and scheduling.
 Routing (‘where’ aspects)- It provides the best and the most economical production
sequence
 Scheduling (‘when aspects’)- It prepares a logical time-table showing the starting and
finishing time of each production work in accordance with some predetermined programme.
20. Differentiate between dispatching and expediting.
 Dispatchingindicates the execution of production plans
 Expeditingmaintains the production flow according to plan till the job is completed.

PART -B

1. Discuss in detail about the various functions of Production planning and control. (Apr-2017,
Apr-2015, Nov-2015, Nov-2016, Nov-2014)

SRI VIDYA COLLEGE OF ENGG&TECH Page 3

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1

1) Materials planning
This material planning function also covers fixation of Raw materials, Standard parts, Semi-
finished products, Assemblies, Fixation of materials standard, Delivery dates,
Standardisation, Reduction of varieties, Procurement of parts, Inspection of materials and
finished parts.

2) Methods planning
The methods planning function identifies, Alternate method of manufacturing, evaluating the
alternate process, selects the best method, Compatible with the available set of facilities and
circumstances, Selection of production process.

3) Machines and equipments

The facility planning function is concerned with Procurement of machines, equipment,
standard tools, Design and manufacture of special jigs and fixtures, Detailed analysis of
available production facilities, Analysis on equipment down time, Maintenance policy
procedure and schedule.

4) Process planning (Routing)

It is the process of Determination of sequence of operations to be performed in the
production process. The routing function determines
 What type of operations to be performed on the product
 Where (department/ machine) the operation will be performed
 How these operations will be performed
 In which sequence the job will be performed (different stages in producing a
product)
The main activities of routing are
 To fix the path of travel
 To breakdown the operations in to elements so as to define each operations in detail
 To decide the setup time and processing time for each operations

5) Estimating
 To estimate the operations time for each operations.
 Estimating involves the extensive use of operation analysis in conjunction with
methods and routing as well as work measurement.

6) Scheduling
 Scheduling is the determining of time and date when each operation is to be
commenced and completed. It includes the scheduling of materials, machines and all
other requisites of production.
 Scheduling means“fitting specific jobs into a general time table so that order may be
manufactured in accordance with contracted liability or in mass production, so that
each component may arrive at and enter into assembly in the order and as is
required."
 Types: Master scheduling; Operation scheduling; Detail operation scheduling

7) Dispatching
Dispatching is the execution phase of planning
Various functions:
 Collection of issuing orders to the work centre (drawings, route sheets,
material requisitions tool requisitions)
 Issuing job orders and authorise operations in accordance with date and time
 Obtaining inspection schedule and direct to inspection section
 Record start and finish time of each machine or by each individual
 Issuing required materials and special tools to the user department

SRI VIDYA COLLEGE OF ENGG&TECH Page 4

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1

8) Expediting (follow-up or progressing)
It is a control function that keeps track of the progress, Execution of production plans,
Production flow according to the plan till the job is completed.
Functions:-
 Status reporting
 Attending to bottlenecks or hold-ups in production and removing the same
 Controlling variations or deviations from the planned performances
 Following up and monitoring progress of work through all stages of production
 Co-ordinating with purchase, stores, tool room and maintenance departments.

9) Inspection and testing

 To ensure that the quality of the product meets the specifications as ordered or
decided in the development and design stage
 Significance in the execution of current plans and plan of future products
 Analyse the limitations to improve the production methods and facilities

10) Evaluation
 Acts a link between the current and future planning
 Valuable information regarding all the problems faced in realizing the products from
the early stage (preplanning) to the shipping stage is gathered in the process
 The evaluated information's are used in pre-planning, planning and control stages in
future manufacturing activities.

2. Explain with example the various aspects of Product development and design. (Apr-2017,
Apr-2015, Nov-2015, Apr-2016, Nov-2016)

(1) Marketing Aspects

A market analysis is done to determine its size, the nature of the customer, and possible trend.
 Proposed product is desirable or acceptable
 Within the buying capacity of the customers
 Satisfy customers preference in regard to shape, size and colour
 Is the product already existing
 Is it new product about which the customer is unaware
 Expected demand both long and short term
 Factors that influence the demand for this proposed product
 Who are the competitors and basis of competition
 Distinguishing features offered by competitors
 Price prevailing in the market
Advertising
 To provide general information about the existence of the product
 To provide technical information about its functional characteristics or utility
 To draw the customers attention to those special features targeted at the customer
 To create demand among a passive population of customers
 To educate the customer about what they want

(2) Functional aspect

The functional analysis reveals the functional scope of the product, i.e., how the product function.
 It is the fundamental factor that affect the design policy
 The customers have to decide and define the functional scope that will satisfy their needs,
taste and ability to pay.

SRI VIDYA COLLEGE OF ENGG&TECH Page 5

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1

(3) Operational aspects

 The product should also be easy to handle and simple to operate.
 The product is used by different people with different skills and knowledge

(4) Durability and dependability aspects

 Durability: it refers to the length of the active life or endurance of the product under given
working conditions.
 Dependability: It refers to the reliability with the product serves its intended function
 Function at right time
 Less maintenance and repair
 Easy Accessibility is a fundamental principle in a sound design and through knowledge on the
part of the operational durability, dependability, maintenance requirements.

(5)Aesthetic aspects
It refers to the final shape and appearance around the basic skeleton which are required for
performance of intended functions
Techniques to enhance aesthetic appeal
 Use of special materials
 Use of colour (paintings, plating's, spraying, lighting)
 Texture as a supplement of colour
 Shape denoted by outer contours and similarity to familiar objects
 Use of lines to break the form to give a sense of continuity, graciousness and attainability
 Novel and attractive packaging of products that influence the minds of the customers to
buy the product.

(6) Production Aspects (Design for Manufacture)

DFM means the design for ease of manufacture of the components of a product

(a) Guidelines for general approach to DFM

Design for manufacture guidelines are basically concerned with optimizing the
manufacturing system with respect to cost, quality and productivity.
Most commonly used DFM guidelines
 Design for maximum number of parts
 Minimise part variations
 Design parts to be multi-functional
 Design parts for multiple use
 Develop a modular design
 Avoid separate fasteners
 Minimise assembly directions
 Maximise design for easy assembly
 Minimise handling
 Evaluate assembly methods
 Eliminate or simplify adjustments
 Avoid flexible components

(b) Guidelines for selection of the manufacturing processes

 Select a process proportions with the required accuracy and surface finish.
 Select component dimension and surface finish parameters that allow the widest
possible tolerance range and surface finish variation.
 Make full use of prototypes

(c) Guidelines for particular process

 Guidelines for moulding processes

SRI VIDYA COLLEGE OF ENGG&TECH Page 6

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1
 Guidelines for Forming processes
 Guidelines for Machining processes

(d) Guidelines for assembly

Design for assembly means the design of the product for ease assembly.

Most commonly used DFA guidelines

 Minimise the number of parts
 Minimise assembly parts
 Design for top-down assembly
 Improve assembly assess
 Maximise part compliance
 Maximise part symmetry
 Optimize part handling
 Avoid separate fasteners
 Provide parts with integral self-locking features
 Standard fasteners
 Drive toward modular design
 Design for ease of labelling and testing.

3. Explain different types of production systems and differentiate between them. (Nov-2017,
Apr-2014, Nov-2014)

(1)Job-shop production
Job-shop production are characterized by manufacturing one or few quantity of products
designedand produced as per the specification of customers within prefixed time and cost. The
distinguishing feature of this is low volume and high variety of products.
A job-shop comprises of general-purpose machines arranged into different departments. Eachjob
demands unique technological requirements, demands processing on machines in a certainsequence.

Job-shop Production is characterized by

1. High variety of products and low volume.
2. Use of general purpose machines and facilities.
3. Highly skilled operators who can take up each job as a challenge because of uniqueness.
4. Large inventory of materials, tools, parts.
5. Detailed planning is essential for sequencing the requirements of each product, capacities
foreach work centre and order priorities.

Advantages
1. Because of general purpose machines and facilities variety of products can be produced.
2. Operators will become more skilled and competent, as each job gives them learning
opportunities.
3. Full potential of operators can be utilized.
4. Opportunity exists for Creative methods and innovative ideas.

Limitations
1. Higher cost due to frequent set up changes.
2. Higher level of inventory at all levels and hence higher inventory cost.
3. Production planning is complicated.
4. Larger space requirements.

(2) Batch Production

American Production and Inventory Control Society (APICS) defines Batch Production as a form
of manufacturing in which the job pass through the functional departments in lots or batches and
each lot may have a different routing. It is characterized by the manufacture of limited number of

SRI VIDYA COLLEGE OF ENGG&TECH Page 7

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1
products produced at regular intervals and stocked awaiting sales.

Batch Production is characterized by

1. Shorter production runs.
2. Plant and machinery are flexible.
3. Plant and machinery set up is used for the production of item in a batch and change of set
upis required for processing the next batch.
4. Manufacturing lead-time and cost are lower as compared to job order production.

Advantages
1. Better utilization of plant and machinery.
2. Promotes functional specialization.
3. Cost per unit is lower as compared to job order production.
4. Lower investment in plant and machinery.
5. Flexibility to accommodate and process number of products.
6. Job satisfaction exists for operators.

Limitations
1. Material handling is complex because of irregular and longer flows.
2. Production planning and control is complex.
3. Work in process inventory is higher compared to continuous production.
4. Higher set up costs due to frequent changes in set up.

(3) Mass Production

Manufacture of discrete parts or assemblies using a continuous process are called Mass
Production.This production system is justified by very large volume of production. The machines are
arrangedin a line or product layout. Product and process standardization exists and all outputs
follow thesame path.

Mass Production is characterized by

1. Standardization of product and process sequence.
2. Dedicated special purpose machines having higher production capacities and output rates.
3. Large volume of products.
4. Shorter cycle time of production.
5. Lower in process inventory.
6. Perfectly balanced production lines.
7. Flow of materials, components and parts is continuous and without any back tracking.
8. Production planning and control is easy.

Advantages
1. Higher rate of production with reduced cycle time.
2. Higher capacity utilization due to line balancing.
3. Less skilled operators are required.
4. Low process inventory.
5. Manufacturing cost per unit is low.

Limitations
1. Breakdown of one machine will stop an entire production line.
2. Line layout needs major change with the changes in the product design.
3. High investment in production facilities.
4. The cycle time is determined by the slowest operation.

(4) Continuous Production

Production facilities are arranged as per the sequence of production operations from the first
operationsto the finished product. The items are made to flow through the sequence of operations
through material handling devices such as conveyors, transfer devices, etc.
SRI VIDYA COLLEGE OF ENGG&TECH Page 8
IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1

Continuous Production is characterized by

1. Dedicated plant and equipment with zero flexibility.
2. Material handling is fully automated.
3. Process follows a predetermined sequence of operations.
4. Component materials cannot be readily identified with final product.
5. Planning and scheduling is a routine action.

Advantages
1. Standardization of product and process sequence.
2. Higher rate of production with reduced cycle time.
3. Higher capacity utilization due to line balancing.
4. Manpower is not required for material handling as it is completely automatic.
5. Person with limited skills can be used on the production line.
6. Unit cost is lower due to high volume of production.

Limitations
1. Flexibility to accommodate and process number of products does not exist.
2. Very high investment for setting flow lines.
3. Product differentiation is limited.

1 .6

4. Write about economics of a new design for a product. (Nov-2017, Nov-2014, Apr-2015, Nov-
2016)

The purpose of introducing a new model to the market is twofold:

 To increase the profit of the organization
 To avoid decline in sales of an existing model due to stiff competition.
Samuel Eilon has proposed a model, which is based on the break-even analysis, to determine
 Whether the additional investment is desirable or not?;
 Whether the new product will be profitable or not?

Let FC=Fixed cost

s=Additional investment made
P1, Q1=Profit accrued and quantity sold before the additional investment respectively
P2, Q2=Profit accrued and quantity sold after the additional investment respectively
Now let us compare P1 and P2 and justify the new additional investment made.

SRI VIDYA COLLEGE OF ENGG&TECH Page 9

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1
We know that the slope of the break-even chart
𝑃𝑟𝑜𝑓𝑖𝑡 𝑃 +𝐹𝑖𝑥𝑒𝑐 𝑐𝑜𝑠𝑡 (𝐹𝐶)
Φ=
𝑞𝑢𝑎𝑛𝑡 𝑖𝑡𝑦 𝑠𝑜𝑙𝑑 (𝑄)
The slope of the break-even chart before the additional investment,
𝑃1 +𝐹𝐶
Φ1= or P1=Φ1 Q1-FC …………… (1)
𝑄1
The slope of the break-even chart before the additional investment,
𝑃2 +𝐹𝐶+𝑠
Φ2= or P2=Φ2 Q2-FC-s ………… (2)
𝑄2
It is desirable that the new profit will be larger than, or at least equal to, the exiting one. i.e., P2>P1
Profit difference=P2 - P1> 0
This condition tells us how many units of the new design ought to be sold in order to ensure that
total profit does not decline.
For P2 - P1> 0, using equation (1) and (2), we get
𝑃
𝜙1 𝑟𝑎𝑡𝑖𝑜 𝑓𝑜𝑟 𝑜𝑙𝑑 𝑑𝑒𝑠𝑖𝑔𝑛
𝑉
D= =𝑝
𝜙2 𝑟𝑎𝑡𝑖𝑜𝑛 𝑓𝑜𝑟 𝑛𝑒𝑤 𝑑𝑒𝑠𝑖𝑔𝑛
𝑣

Q1  s 
 1   XD ………… (3)
Q2  P1  FC 
In equation (3), when D=1, Q2 must be greater than Q1 to justify the additional investment (s) on
design change.

5. Why it is necessary to analyze the product and explain the various analysis that are the
carried out? (Apr-2014)

Product Analysis
The main objectives of product analysis is to obtain a qualitative as well as quantitative evaluation of
the influencing factors which determine primarily the success of a manufactured product
 Marketing Aspects (Refer Q. No: 2)
 Product characteristics (Refer Q. No: 2)
• Functional aspect (Refer Q. No: 2)
• Operational aspects (Refer Q. No: 2)
• Durability and dependability (Refer Q. No: 2)
• Aesthetic aspects (Refer Q. No: 2)
 Production aspects (Refer Q. No: 2)

 Economic analysis

(1) Profit consideration

Total cost = setup cost, material cost, labour cost, overhead, storage and distribution.
Sales Price = Total cost + profit

Techniques to increase the total profit

(i)Pure pricing strategy - Increase the margin of profit per unit volume and hence the
sales price without changing the total cost
(ii) Marketing strategy (design, advertising and pricing) - The total cost remains
unchanged but to improve the ratio of value to price and widen the market.
(iii) Reduction of in-house production cost- Reduce the total production cost and pass
some of the benefits to the customers in the form of reduced sales prices.

SRI VIDYA COLLEGE OF ENGG&TECH Page 10

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1

(2) Effect of standardisation, simplification, specialization

(a) Standardisation
The process of defining and applying the conditions necessary to ensure that a given
range of requirements can normally be met with a minimum variety and in a
reproducible and economic manner on the basis of the current techniques.

Objectives of standardization
• To achieve maximum overall economy (cost, human effort, conservation of essential
materials)
• To ensure maximum convenience in use
• To adopt the best possible solutions to recurring/ continuous problems
• To define requisite/desired levels of quality

Classification of standardisation
• Basic standardisation (scale, limits, voltages, preferred numbers, preferred sizes,
limits and fits, screw thread profile, surface texture, testing procedures)
• Dimensional standardisation (bolts, nuts, screws, keys, rivets, bearings)
• Material standardisation (quality, size, shape and physical aspect)
• Equipment standardisation (machines and equipment's, location, layout and
performance rating)
• Process standardisation – maximum benefit and cheapness in production
• Quantity standardisation
• Safety measures standardisation
• Personnel standardisation
• Administrative standardisation – office methods to assure most effective method of
working

Activities of standardisation
• Physical dimension and tolerance of components
• Rating of machines and equipments (temp, current, speed, …)
• Specification of physical and chemical properties
• Methods of testing and performance
• Methods of installation to comply with minimum precaution measures and
convenience of use

Benefits of standardisation
• Reduction of material waste and obsolescence
• Reduced manufacturing cost and hence reduction in price
• Uniform quality of product
SRI VIDYA COLLEGE OF ENGG&TECH Page 11
IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1
• Reduced maintenance, servicing and replacement
• Reduced work in process and finished products
• Increased customer confidence to buy products
• Better and quicker product deliveries

Limitations of standardisation
• Reduced choice of customers because of reduced variety
• Modification in product design or new product may take a very long time
• Excess standardisation of operations and procedure will reduce the initiative and
interest of workers

Preferred numbers
• It is defined as series of numbers selected to be used for standardization purposes in
preferences to other numbers.
• It leads to simplified practice

(b) Simplification
• It is the process of reducing the variety of production manufactured.
• It is also termed as “product line contraction”
• It makes product or assembly, simpler and less complex.
• Enables the production department to department to improve planning, achieving
higher rates of production and machine utilisation and simplify control production

Benefits of simplification
• It reduces manufacturing operations and risk of obsolescence
• It makes possible the effective utilization of special purpose and automatic machines.
• It simplifies production planning and supervision
• It leads to lower manufacturing costs and higher sales
• It provides quick delivery and better after-sales service
• It reduces inventory and hence better inventory control

Limitations of simplification
• It cannot satisfy a wide range of demand
• It cannot enable better contact with the demand to study its tastes and requirements
• It cannot create demand
• It creates a constant source of conflict between marketing and production

(c) Specialization
 Specialization means having a specialisation or expertise in particular product line
instead of diversification
 Specialisation is the process whereby particular firms concentration on the
manufacture of a limited number of products or types of products.
 It is applicable to products processes, materials, resources or any other aspect of
management / manufacture/ design

Advantages of specialisation
• Better utilization of equipment's
• Higher productivity
• Greater efficiency
• Better quality
• Reduced production cost and hence lower unit price

Disadvantages of specialisation
• Lesser flexibility in adjustments to changed situations
• Monotony in work and loss in initiative

SRI VIDYA COLLEGE OF ENGG&TECH Page 12

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1
(3) Break even analysis
• It is also known as cost-volume-profit analysis.
• It is the study of inter relationship among a firm’s sales cost and operating profit at
various levels of output.
• It reveals the effect of fixed cost, variable cost prices, and sales mix on the
profitability of a firm.
Aims of Break-even analysis
• To help in deciding profitable level of output, below which losses will occur
• To compute cost and revenues for all possible volumes of output to fix budgeted sales
• To take decision regarding make or buy
• To decide the product mix and promotion mix
• To take plant expansion decisions
• To take equipment replacement decisions

Assumptions made in Break-even analysis

• Selling price will remain constant at all the sales levels (quantity discounts are not
available)
• There is linear relationship between sales volume and cost.
• It is assumed that the cost are classified into fixed and variable costs, ignoring the
semi-variable costs.
• It considers that production is equal to sales
• No other factors will influence the cost except the quantity

Break-even point
• The break-even point may be defined as the level of sales at which total revenues and
total costs are equal.
• It is a point at which the profit is zero.
• It is also known as no-profit no-loss point
• The management can change the break-even point by changing fixed cost, variable
cost and selling price
Determination of BEP
• The Algebric method
– BEP in terms of physical units
– BEP in terms of sales value
– Contribution
– P/V ratio (Profit – Volume Ratio)
• The graphical method

Break even chart

AB - Fixed costs which are unaffected by production volume.

BF- The variable costs associated with production volume.
AE- The variation in income against sales volume. Theassumption is that everything
produced is sold.

SRI VIDYA COLLEGE OF ENGG&TECH Page 13

IE-6605 PRODUCTION PLANNING AND CONTROL UNIT-1
C- this is the point at which break-even is achieved, that is,
Sales income = total cost, and is known as the break-even point.
D - extrapolating down from point C to the x-axis gives the quantity at which break-even is
achieved, that is, the break-even quantity.
The production of parts before point C results in a loss, any parts produced after point C
results in a profit

The break-even quantity can also be calculated using the fixed costs, variable costs and
selling price as follows:

Limitations of BEA
• It is a static picture as it assumes constant relationship of output to cost and revenue
• In practical applications the selling price and variable cost per unit volume are not
constant and hence the BEA cannot be more realistic
• BEA is used for short run analysis. It cannot be used for long range of products

6. What are the assumptions made in Break-Even analysis? An analysis of a company reveals the
following the following information:

Cost element Variable cost Fixed cost

Direct material 32.8 -
Direct Labour 28.4 -
Factory Overheads 12.6 1, 89,900
Distribution Overheads 4.1 58, 400
General Administrative Overheads 1.1 66, 700
Budgeted sales 18, 50, 000
Determine Break-Even sales volume. The profit at the budgeted sales volume. The profit if the
actual sales drop by 10 %, the profit if the actual sales increase by 5% for budgeted sales.
(Apr- 2016)
Refer PART-A Question: 16

SRI VIDYA COLLEGE OF ENGG&TECH Page 14