PRODUCTION ENGINEERING

(MENG 514)

MECHANICAL AND MAINTENANCE ENGINEERING

HONS 2 (YEAR 5)

FIRST SEMESTER

By:
Ing. Steven Kenie Cafu Bahun

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COURSE OUTLINE

Production Management

Production Planning and Control (PPC)

Breakeven Analysis (BEA)

Aggregate planning with Worked examples

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 PRODUCTION MANAGEMENT

Objectives of Production Scope of

production Management Production
management Functions Management

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 PRODUCTION MANAGEMENT
❖Production management is defined as a management function which plans,
organizes, coordinates, directs and controls
❖The material supply and Processing activities of an enterprise,
❖So that specified products are produced by specified methods to meet an
approved sales or supplies program.
❖These activities are being carried out in such a manner that Labor, Plant and
Capital available
❖are used to the best advantage of the organization.
❖ or Simply: the process that manages the conversion of production inputs
into production outputs
❖The purpose is to ensure that production stays on schedule and within
budget,
❖Improve efficiency and productivity, Reduce costs, and Ensure quality
standards are met.
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 PRODUCTION MANAGEMENT
What are the objectives of production management?
❖ To produce goods or services of right quality and quantity at the
I. predetermined time and
II. at pre-established cost /
III. at minimum cost
❖ Thus, the objective of production management are reflected in
I. Right Quality
II. Right Quantity
III. Predetermined Time and
IV. Pre-established Cost (Manufacturing Cost)
❖ Minimize the use of resources to the optimum level. These are 4 M‘s:
Machinery, Materials, Manpower and Money. These inputs are to be used to full
extent to result minimum cost and time.
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 PRODUCTION MANAGEMENT
❖Maximize the utilization of manpower. Minimizing the total cost of production
with continuous elimination of non-value-added activities and improving labor
productivity on the production shop floor.
❖Production planning: Creating a detailed production schedule to allocate
resources effectively.
❖Resource optimization: Utilizing all available resources (labor, materials,
machinery) to their full potential.
❖Continuous improvement: Implementing strategies to constantly improve
production processes and quality.
❖Competitive advantage: Producing high-quality products at competitive prices
to gain a market edge.
❖Compliance with regulations: Adhering to industry standards and safety
regulations.

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 PRODUCTION MANAGEMENT
Production Management Functions
Conceptual framework for activities in Production Management
based on the 5 P’s, they include;
Product: Product is the link between production and marketing.
❖It is not enough that a customer requires product, but the
organization must be capable of producing the product.
Plant: The plant accounts for major investment (fixed asset).
❖The plant should match the needs of the product, market, the
worker and the organization.
Processes: There are always number of alternatives methods of
creating a product.
❖But it is required to select the one of the best method which
attains the objectives.
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 PRODUCTION MANAGEMENT

Programs: The program here refers to the time-table of production.

❖ Thus, the program prepares schedules for purchasing,
transforming, maintenance, cash and storage and transport.
People: Production depends upon people.
❖ The people vary in their attitudes, skill and expectations from
the work.
❖ Thus, to make best use of available human resource, it is
required to have a good match between people and
❖ jobs which may lead to job satisfaction.

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 PRODUCTION MANAGEMENT
Scope of Production Management
❖Strategic Level
❖Design and Development of New Product Scope of Production Management
❖Process Design and Planning
❖Facilities Location and Layout Planning
Operational
❖Design of Material Handling Strategic Level Level
❖Capacity Planning
❖Operational Level
❖Production Planning ❖Design and Development of
❖Production Planning
❖Production Control
❖Production Control New Product
❖Process Design and Planning ❖Inventory Control

❖Inventory Control ❖Location and Layout ❖Product maintenance &

replacement
Planning
❖Product maintenance & replacement ❖Material Handling ❖Cost Control & Cost
Reduction
❖Cost Control & Cost Reduction ❖Capacity Planning
❖Waste reduction

❖Waste reduction
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PRODUCTION PLANNING AND CONTROL

PPC Objectives Uses and

Elements of Limitations of Benefits of
Operational Need for PPC and Functions importance of
PPC PPC PPC
Flow of PPC PPC

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 PRODUCTION PLANNING AND CONTROL
❖Production planning and control (PPC) is the process of planning or
deciding
❖On the resources required for future manufacturing operations
❖And how to allocate and time schedule these resources to produce the
desired products on time at the least total cost.
❖Resources include manpower, plant, machineries, raw materials, etc.
❖PPC ensures that the right materials, machines, and manpower are available
at the right time,

❖and that production goals are met in a cost-effective manner.

❖Production planning and control is most essential for any organization,
❖and it remains dynamic and continuous within an organization.
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 PRODUCTION PLANNING AND CONTROL

decision on the sequence

Planning of of operations to achieve
production what has been planned

follow up action to check the PPC also setting of starting and

progress of operations involves finishing time for production

proper dispatching of the

material

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 PRODUCTION PLANNING AND CONTROL

PPC Operational Flow

Production Control System

Demand Sales and
Forecasting Customer
Order Entry

Material
Aggregate Shop-floor Shipping
Requirement Production
Planning scheduling and
Planning
and control Receiving

Inventory
Inventory Vendors
Management

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 PRODUCTION PLANNING AND CONTROL

Production Objectives Interrelations

High
Profitability

Low High
Costs Sales

Low Unit Quality High Customer

Costs Product Service

High High Low Fast Many

Throughput Utilization Inventory Response products

Less Short Low High More

Variability Cycle Times Utilization Inventory Variability

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 PRODUCTION PLANNING AND CONTROL
Need for PPC
❖Production system can be compared to the nervous system with
PPC as the brain.
❖Production Planning and Control is needed to achieve:
❖Effective utilization of firms’ resources
❖To achieve the production objectives with respect to quality,
quantity, cost and timeliness of delivery.
❖To obtain the uninterrupted production flow in order to meet
customers varied demand with respect to quality and
committed delivery schedule.
❖To help the company to supply a good quality products to the
customer on the continuous basis at competitive rates.
❖Efficient production

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 PRODUCTION PLANNING AND CONTROL
Objectives of PPC

❖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 and cost.
❖Optimum Scheduling of resources
❖Coordinate with other departments relating to production to
achieve regular balanced and uninterrupted production flow
❖To conform to delivery commitments
❖To be able to make adjustments due to changes in demand
and rush orders.

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 PRODUCTION PLANNING AND CONTROL

Functions of PPC
❖ Forecasting to predict customer demand on various
products over a given horizon.
❖ Scheduling: It provides the schedule or timetable
for manufacturing activities. Therefore, meeting
delivery commitments and completing production on
time.
❖ Routing: PPC describes the flow of work and the
sequence of production activities.
❖ Make or Buy Decisions: It plays an important role in
taking make or buy decisions. Generally, these
decisions are taken in the planning phase of PPC.
❖ Requirements Planning: PPC determines the exact
quantity of materials required for production. Also,
it assures the availability of materials whenever
needed.
❖ Material Control: Besides availability, it also ensures
the best use of resources and eliminates waste.
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 PRODUCTION PLANNING AND CONTROL

Elements of PPC

The concept of PPC is made up of Production Production

two elements: Planning Control
❖ Production Planning:
Planning Dispatching
Involves forecasting the requirements
and making necessary arrangements for
future production Routing Follow up

❖ Production Control:
Production control takes over from where Scheduling Inspection
the scope of planning ends.
It inspects the operations and actual
Loading Corrective
implementation of the production plan.

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 PRODUCTION PLANNING AND CONTROL
Production Planning
Planning
❖It is the first element that involves deciding in advance what is to
be done in future.
❖An organizational set up is created to prepare plans and policies.
❖Various inputs, charts, manuals and production budgets are also
prepared.
❖Planning provides a sound base for control. A separate department
is set up for the Planning phase.
Routing
❖Involves determining the exact path which will be followed in
production.
❖It is the selection of the path or stages along which each unit must
pass before reaching the final stage.
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 PRODUCTION PLANNING AND CONTROL

❖The stages from which goods are to pass are decided in the
planning process.
❖Analysis of Cost of the Product and Preparation of Production
Control Forms
❖The following steps are considered for completing a routing
procedure:
❖Deciding what part to be made or purchased
❖Determining Materials required
❖Determining Manufacturing Operations and Sequences
❖Determining of Lot Sizes
❖Determining of Scrap Factors

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 PRODUCTION PLANNING AND CONTROL
Scheduling
❖is determining of time and date when each operation is to be
commenced or completed.
❖The time and date of manufacturing each component is fixed in
such a way that assembling for final product is not delayed in any
way.
❖Different types of scheduling is given below:
❖Master Scheduling: It is prepared by keeping in view the order
or likely sales order in near future.
❖Manufacturing Scheduling: It is used where production process
is continuous.
Involves the order of preference to manufacture.
❖Detail Operation Scheduling: It indicates the time required to
perform each and every detailed operations of a given process
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 PRODUCTION PLANNING AND CONTROL

Production Control
Dispatching
❖Is the transition from planning phase to action phase. In this
phase, the worker is ordered to start manufacturing the product.
❖Dispatching involves the actual granting of permission to proceed
according to plans already laid down.
❖In dispatching, orders are issued in terms of their priority. The
dispatch section of the PPC is responsible:
❖Checking the availability and transferring materials from the
main stores to the point in need.
❖Get ready production aid and issuing it to manufacturing
departments as need.
❖Obtaining specific drawings from the drawing office.
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 PRODUCTION PLANNING AND CONTROL

❖ Informing the process section that production is commencing.

❖ That all drawings, layout and tools are withdrawn and
returned to their correct location at the end of manufacturing
❖ Procedures for dispatching includes:
❖ Centralized Dispatching: where orders are directly issued to
workmen and machines.
It helps in exercising effective control.
❖ Decentralized Dispatching: work orders are issued to the
foreman or dispatch clerk of the department or section.
This system can have setbacks in achieving co-ordination
among different departments.

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 PRODUCTION PLANNING AND CONTROL
Follow Up & Expediting
❖Is that branch of production control procedure which regulates the
progress of materials and part through the production process.
❖Progress may be assessed with the help of routine reports or
communication with operating departments.
❖The follow up procedure is used for expediting and checking the
production progress.
Inspection
❖Is the process of ensuring that inputs and outputs conform to
requisite quality.
❖It is done at various levels of production process to achieve
standards across the production process.
❖It ensures the maintenance of pre-determined quality of products.
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 PRODUCTION PLANNING AND CONTROL
Uses of PPC
❖Preparation of production budget
❖Devising manufacturing methods and sequence of operations
❖Deciding type of machines and equipments
❖Preparation of operation sheets and instruction cards
❖Estimating men, machine and material requirements
❖Undertaking time and motion studies
❖Preparing master schedules
Importance of PPC
1. For Increasing Production
❖While arranging inputs, PPC minimizes idleness of men and
machines.
❖Therefore, it helps in raising industrial output.
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 PRODUCTION PLANNING AND CONTROL

❖ For coordinating plant activity: since PPC is carried out in a number

of processes, then activities are synchronized for smooth working.
❖ It helps in eliminating unnecessary costs through proper estimation.
❖ It assists in availing better customer services that may generate re-
orders.
❖ PPC leads to a reduction in inventory management costs.
❖ Employment of the right resources at the right places.
❖ Better coordination between various activities at the plant.
❖ Smooth flow of production processes.
❖ Avoid wastage of resources.

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 PRODUCTION PLANNING AND CONTROL
Limitations Of PPC
❖ Assumptions: since, PPC is mostly on assumptions, In
case the assumptions prove correct, the PP will go
smoothly. Otherwise…
Assumpt ❖ Rigidity: too much rigidity for employees in following
ions a fixed pattern may not help in smoothening flow of
work.
❖ Difficult for small firms: This process is time
consuming and therefore not affordable for small
firms
External
Rigidity
Factors ❖ Costly: It is a costly given that its implementation
requires separate persons for functions of planning,
LIMITATIONS expediting, dispatching etc.
OF PPC
❖ External Factors: External factors like natural
calamities, change in technology, government controls
etc reduce effectiveness of production planning.

Difficult
y for
Costly
small
firms

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 PRODUCTION PLANNING AND CONTROL
Benefits of PPC
❖Higher quality
❖Better resource utilization and reduced inventory
❖Reduced manufacturing cycle time
❖Faster delivery
❖Better customer services
❖Lower production costs and Lower capital investment
❖Higher customer service
❖Improved sales turnover
❖Improved market share
❖Improved profitability
❖Flexibility
❖Dependability
❖Lower prices
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 BREAKEVEN ANALYSIS

Cost-Volume-
Assumptions Applications Advantages of Limitations of When do we Worked
Profit
of BEA of BEA BEA BEA perform BEA examples
Relationship

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 BREAKEVEN ANALYSIS
Breakeven analysis (BEA)
❖ Is a cost-volume-profit (CVP) analysis that helps a business
determine the point at which it will break even.
❖ The breakeven point (BEP) is where revenues will equal its costs,
and the business will not make a profit or incur a loss.
❖ It determines how much sales volume is required to cover both
fixed and variable costs = breakeven sales.
❖ At BEP,
𝑇𝐶 = 𝑇𝑅,
𝐿𝑂𝑆𝑆 = 0, 𝑎𝑛𝑑
𝑃𝑅𝑂𝐹𝐼𝑇 = 0
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑠𝑎𝑙𝑒𝑠 = 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡
❖ BEP is simply the point where the business is at revenue and cost
equilibrium. 30
 BREAKEVEN ANALYSIS
Cost-Volume-Profit (CVP) relationship
❖ a method that helps businesses understand how changes in costs
and sales affect their profits.
❖ In marginal costing, marginal cost varies directly with the volume of
production or output.
❖ While fixed cost (rent, taxes, salaries..) remains constant
regardless of output volume, Variable cost (Raw materials, Raw
materials,..) varies with change in output volume.
❖ Profit depends on manufacturing cost, volume of sales and variable
cost management.
❖ Volume of sales depends on production volume and market forces.
❖ CVP analysis paints the profit structure used to distinguish among
the effects of sales, fluctuations in volume and changes in prices of
products. 31
 BREAKEVEN ANALYSIS
Assumption of BEA
❖ Costs includes fixed and variable cost
❖ Cost volume profit relationships are linear
❖ Fixed costs ≠ production, while variable costs = change in
production.
❖ Sales prices will not change with change in sales volume
❖ All units produced are sold, so there is no need to consider
inventory.
❖ The business operates in a steady state.

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 BREAKEVEN ANALYSIS
Applications of BEA
New Product
Lunch

Expansion Pricing
Decision Strategy

Modernizatio
n and Cost
automation Management
decision
Applications
of BEA

Sensitivity Sales
analysis Forecasting

Market Investment
Analysis Decision

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 BREAKEVEN ANALYSIS
Applications of BEA
❖ New product lunch: businesses can assess if the potential sales
volume justifies the potential investment and production costs.
❖ Pricing Strategy: businesses can set appropriate prices for their
products to ensure they cover all costs and reach profitability at a
desired sales volume.
❖ Cost Management: businesses can identify areas where they can
reduce costs to lower their BEP and increase profitability.
❖ Sales Forecasting: businesses can estimate how many units they
need to sell to achieve their desired profit target.
❖ Investment Decisions: When considering new investments, the
break-even analysis can help evaluate the potential return on
investment and the time required to recoup initial costs.
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 BREAKEVEN ANALYSIS

❖ Market Analysis: By comparing the break-even point to market

demand, businesses can assess the feasibility of entering a new
market.
❖ Sensitivity Analysis: BEP analysis with different assumptions about
costs and sales prices can help understand the potential impact of
various market conditions on their profit ability.
❖ Modernization and automation decision: BEP provides
information needed to decide on a modernization or automation
program.
❖ Expansion decision: BEP analysis gives the green or red light to
businesses for an expansion decision.

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 BREAKEVEN ANALYSIS
Advantages of BEA

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 BREAKEVEN ANALYSIS
Limitations of BEA

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 BREAKEVEN ANALYSIS
When is Breakeven Analysis Performed?
❖ BEA is usually employed when a business is considering a
significant change, such as:
❖ a new product, entering a new market, changing pricing
strategies, expanding operations, or making cost adjustments.
❖ Because, it helps determine the sales volume needed to cover all
costs and start generating profit in these scenarios;
❖ essentially, BEA is performed anytime to assess the viability of a
new initiative or the impact of a change on profitability.
Given that:
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 – 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡
= 𝑇𝑅 − 𝑇𝐶
At BEP, 𝑇𝐶 = 𝑇𝑅, 𝐿𝑂𝑆𝑆 = 0, 𝑎𝑛𝑑 𝑃𝑅𝑂𝐹𝐼𝑇 = 0
𝐵𝑟𝑒𝑎𝑘 𝑒𝑣𝑒𝑛 𝑠𝑎𝑙𝑒𝑠 = 𝑓𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 + 𝑣𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 38
 BREAKEVEN ANALYSIS
Costs in businesses either linear or non-linear usually consists of
two components:

Buildings, rent,
Fixed Costs insurance, equipment,
(FC) capital, they are usually
constant

Total costs
(TC)
Labor, materials,
contractors, marketing,
Variable Cost
(VC) adverts.. These costs
maybe linear or non with
the decision variable.

𝑇𝑜𝑡𝑎𝑙 𝑐𝑜𝑠𝑡 = 𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡 + 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡𝑠

𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶
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 BREAKEVEN ANALYSIS
❖ The following diagram illustrates the basics of the breakeven
analysis

❖ It can be seen that we have profit if the production level is above

the breakeven quantity and loss if it below. 40
 BREAKEVEN ANALYSIS
Worked Examples
Example 1: The fixed costs at company X are $1 million annually.
The main product has revenue of $8.90 per unit and $4.50 variable
cost. Determine:
(a)The breakeven quantity per year and
(b)The company’s position if 200,000 units are sold.
Solution:
Fixed costs = $1 million per annum
Revenue = $8.90 per unit Variable cost = $4.50 per unit
(a) 𝐿𝑒𝑡 𝑄𝐵𝐸 𝑏𝑒 𝑡ℎ𝑒 𝑏𝑟𝑒𝑎𝑘𝑒𝑣𝑒𝑛 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
𝐹𝑖𝑥𝑒𝑑 𝐶𝑜𝑠𝑡𝑠
𝑄𝐵𝐸 =
(𝑅𝑒𝑣𝑒𝑛𝑢𝑒 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡 – 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 𝑝𝑒𝑟 𝑈𝑛𝑖𝑡)
1,000,000
𝑄𝐵𝐸 = = 𝟐𝟐𝟕, 𝟐𝟕𝟑 𝒖𝒏𝒊𝒕𝒔
8.90 − 4.50
Hence, company X must sell 227,273 units to breakeven. 41
 BREAKEVEN ANALYSIS
(b) The company’s position depends on whether it is making profit or loss

𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝑙𝑜𝑠𝑠 = 𝑇𝑜𝑡𝑎𝑙 𝑅𝑒𝑣𝑒𝑛𝑢𝑒 − 𝑇𝑜𝑡𝑎𝑙 𝐶𝑜𝑠𝑡

𝑃𝑟𝑜𝑓𝑖𝑡/𝑙𝑜𝑠𝑠 = 𝑇𝑅 − 𝑇𝐶
𝐁𝐮𝐭
𝑇𝑅 = 𝑅 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 8.90 × 200,000 = 1,780,000
𝑉𝐶 = 𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝐶𝑜𝑠𝑡 × 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦
A𝐧𝐝
𝑇𝐶 = 𝐹𝐶 + 𝑉𝐶 = 1,000,000 + 4.50 × 200,000
𝑇𝐶 = 1,900,000
Therefore:
𝑃𝑟𝑜𝑓𝑖𝑡 𝑜𝑟 𝑙𝑜𝑠𝑠 = 1,780,000 − 1,900,000
= −𝟏𝟐𝟎, 𝟎𝟎𝟎

Hence, company X is running at loss.

42
 BREAKEVEN ANALYSIS
Example 2. A product currently sells for $12 per unit. The variable
costs are $4 per unit, and 10,000 units are sold annually and a profit
of $30,000 is realized per year.
A new design will increase the variable cost by 20% and fixed cost by
10% but sales will increase to 12,000 units per year.
(a)At what selling price do we breakeven
(b)If the selling price is to be kept same ($12/unit), what will the
annual profit be?
Solution.
𝑇𝑉𝐶 = 4 × 10,000 = $40,000
Initially:
𝑇𝑅 = 12 × 10,000 = 120,000
𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 1 = $12 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝐵𝑢𝑡 𝑇𝐶 = 𝑇𝑉𝐶 + 𝐹𝐶
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 = $4 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡
𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑅 – 𝑇𝐶 = 𝑇𝑅 – (𝑇𝑉𝐶 + 𝐹𝐶)
𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 10,000 𝑠𝑜𝑙𝑑 𝑝𝑒𝑟 𝑦𝑒𝑎𝑟
30,000 = 120,000 – 40,000 – 𝐹𝐶
𝑃𝑟𝑜𝑓𝑖𝑡 = $30,000
𝐹𝐶 = $50,000
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 BREAKEVEN ANALYSIS
For the new design:
𝑉𝑎𝑟𝑖𝑎𝑏𝑙𝑒 𝑐𝑜𝑠𝑡 = $[4 + (4 × 0.2)] = $4.80
𝐹𝑖𝑥𝑒𝑑 𝑐𝑜𝑠𝑡 = $[50,000 + (50,000 × 0.1)] = $55,000
𝑁𝑒𝑤 𝑄𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 12,000
𝐿𝑒𝑡 𝑡ℎ𝑒 𝐵𝐸 𝑆𝑒𝑙𝑙𝑖𝑛𝑔 𝑃𝑟𝑖𝑐𝑒 = $𝑋 𝑝𝑒𝑟 𝑢𝑛𝑖𝑡

𝑇𝑉𝐶 = 4.80 × 12,000 = $57,600

𝑇𝑅 = 𝑋 × 12,000 = 12,000𝑋
𝑇𝐶 = 𝑇𝑉𝐶 + 𝐹𝐶 = 57,600 + 55,000 = $112,600

(a) Let us consider what happens btw TR (b) The annual profit of the new
and TC at BE point. we have that: design if we sell at $12 per unit,
𝑇𝑅 = 𝑇𝐶 𝑃𝑟𝑜𝑓𝑖𝑡 = 𝑇𝑅 – 𝑇𝐶
𝑇𝑅 = 𝑇𝑉𝐶 + 𝐹𝐶 = (12,000 × 12) – 112,600
12,000𝑋 = 112,600 = 144,000 − 112,600
𝑿 = $𝟗. 𝟑𝟖 𝒑𝒆𝒓 𝒖𝒏𝒊𝒕𝒔. 𝑷𝒓𝒐𝒇𝒊𝒕 = $𝟑𝟏, 𝟒𝟎𝟎

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 BREAKEVEN ANALYSIS
Example 3. A defense contractor has been able to summarize its total
annual fixed costs as $100,000 and the total variable cost per unit of
production as $33.
(a)If only 5,000 units is all that is expected to sell to the government
this year, what should the per unit selling price be to make a 25%
profit this year.
(b)If foreign sales of 3,000 units per year is to be added to the 5,000
units government contract, and a 25% profit is again acceptable,
what could be the new selling price per unit?
Solution.
(a) For the first government contract,
𝐹𝐶 = $100,000
𝑇𝑉𝐶 = $33 × 5,000 = $165,000
𝑇𝐶 = 100,000 + 165,000 = $265,000
𝑃𝑟𝑜𝑓𝑖𝑡 = 25% 45
 BREAKEVEN ANALYSIS
(a) Considering the percentage profit (b) For the additional foreign sales,
to be made: 𝑁𝑒𝑤 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 = 3,000 + 5,000 = 8,000
𝑇𝑅 − 𝑇𝐶 𝑇𝑉𝐶 = 33 × 8,000 = $264,000
% 𝑝𝑟𝑜𝑓𝑖𝑡 =
𝑇𝐶 𝑇𝐶 = 100,000 + 264,000 = $364,000
𝑇𝑅 − 265,000 𝑨𝒍𝒔𝒐,
0.25 =
265,000 𝑇𝑅 − 𝑇𝐶
% 𝑝𝑟𝑜𝑓𝑖𝑡 =
66,250 = 𝑇𝑅 − 265,000 𝑇𝐶
𝑇𝑅 = $331,250 0.25 × 364,000 = 𝑇𝑅 − 364,000
𝐿𝑒𝑡 𝑢𝑛𝑖𝑡 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 = 𝑥 𝑇𝑅 = $455,000
𝐵𝑢𝑡 𝑇𝑅 = 𝑢𝑛𝑖𝑡 𝑝𝑟𝑖𝑐𝑒 × 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦 𝐿𝑒𝑡 𝑢𝑛𝑖𝑡 𝑠𝑒𝑙𝑙𝑖𝑛𝑔 𝑝𝑟𝑖𝑐𝑒 = 𝑦
∴ 331,250 = 𝑥 × 5,000 𝐵𝑢𝑡 𝑇𝑅 = 𝑢𝑛𝑖𝑡 𝑝𝑟𝑖𝑐𝑒 × 𝑞𝑢𝑎𝑛𝑡𝑖𝑡𝑦
𝑥 = 66.25
∴ 455,000 = 𝑦 × 8,000
Hence, the unit selling price = $66.25 𝑦 = 56.875
Hence, for the additional 3,000 units, the
unit selling price = $56.875

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