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Cost-volume analysis is used in several different areas of POM and QM especially capacity planning and location analysis. Breakeven and cost/volume analysis are included in nearly every POM textbook. Cost/volume analysis is used to find the point of indifference between two options based on fixed and variable costs. A breakeven point is computed in terms of units or dollars. Breakeven is simply a special case of cost/volume analysis where there is one fixed cost, one variable cost and a revenue per unit.
In cost-volume analysis we compare two or more options to determine what option is least costly at any volume. The costs consist of two types - fixed costs and variable costs but there may be several individual costs which comprise the fixed costs or the variable costs In the example below we are indicating that there are 5 different individual costs and two options.
Cost Type. Each type of cost must be identified as either a fixed cost or a variable cost. The default is that the first cost in the list is fixed and that all other costs are variable. These values can be changed by using the usual dropdown box.
Costs. The specific cost for each option gets listed in the two columns in the table.
Volume. If a volume analysis is desired then enter the volume at which this analysis should be
performed. The volume analysis will compute the total cost (revenue) at the chosen volume. If the
volume is 0 then no volume analysis will be performed other than for the breakeven point. We
have asked for a volume analysis at 250 units.
The Cost/Volume or Breakeven Analysis Solution Screen
The solution screen is very straightforward. In the screen above there are 5 costs with some of them being fixed and some of them being variable. The program displays the following four outputs.
Total Fixed Costs. For each of the two options the program takes the fixed costs, sums them up and lists them below the table. In this example the total fixed costs for option 1 are $1300 (800+500) while the total fixed costs for option 2 are $900 (700+200).
Total Variable Costs. The program identifies the variable costs, sums them up and lists them. In this example the total variable costs for option 1 are $10 per unit while for option 2 they are $12 per unit.
Break even point in units. The breakeven point is the difference between the fixed costs divided by the difference between the variable costs and this is displayed in units. In the example it is 200 units.
Break even point in dollars. The breakeven point can also be expressed in dollars.
A volume analysis has been performed for a volume of 250 units. The total fixed costs and total variable costs have been computed for each option and these have been summed to yield the total cost for each option.
A graph is available as shown below.
Breakeven analysis
Example 2 - Using Breakeven Analysis with prices
One standard type of break even analysis has revenue versus cost.
Data entry for this option is slightly different in that the program creates a column for costs and a column for revenues. The fixed and variable costs get entered in the cost column and the revenue per unit is placed in the revenue column.
We have used three types of cost to set up the table. The first is for the fixed cost of $10,000, the second is for the variable cost of $20 per unit and the third is for the (variable) revenue of $25 per unit. The program will compute a break-even volume of 2000 units or $50,000 (not shown).
Example 3 - Breakeven point with three options
The break even module can perform a breakeven analysis for two or three options. Below we demonstrate the output for a 3 option breakeven. Of course, while there are three breakeven points only two of them are relevant.
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