CHAPTER Introduction & Break Even Analysis 1.1. INTRODUCTION Industrial engineering is concerned with bringing together and effective utilization of various resources to facilitate efficient production operation. Effective utilization of resources means that input to the production - operation system (Example: people, material, equipment and information) are used in the correct manner so that they form an integrated combination to meet production or operation objectives. ‘* Industrial engineering is not only concerned with the system of material, equipment and processes but also with the people interacting with this sytem both from within and from outside. Example: workers and operators with-in the sysem for work study, time and motion study etc. and customers outside the system to determine demand and feedback. + Industrial engineering is not only restricted to manufacturing but also includes service sectors. 1.2. BREAK EVEN ANALYSIS (BEA) Cost-volume and profit analysis examines the interaction of a firm's sales volume, selling price, cost structure and profitability. Itis a powerful tool in making managerial decisions, for example: minimum number of units to produce to earn profit and number of units to be produced to earn a specific amount of profit and other investment decisions. Target profit analysis is concerned with estimating the level of sales required to attain a specific target profit whereas break-even is a special case of target profit analysis with zero target profit. For Break-even analysis costs are divided into variable and fixed elements. Assumptions of Break even analysis: * Selling price is constant. * Costs are linear and divided into variables and fixed. * Inventories do not change. ‘* In multi-product companies, sales mix is constant. (a) Fixed Cost:. This cost remains fixed or constant irrespective of volume of production. Itincludes cost ‘of machine, rent of building, salary of watchman, higher officials, advertisement cost, insurance cost, interest etc. (b) Variable Cost (V = vx): This cost increases directly and proportionally with the volume of production and it includes direct material, direct labour and running cost. (6) Total Cost: It indicates the total expenditure made in order to produce a certain number of units and itis the sum of fixed and variable cost. Theory with MADE EASY www.madeeasypublications.org Solved “Examples [ME PublicationsMechanical 2 Engineering ‘Volume of production (units) x —s. Gr proauetion (unit) x vie and fixed cost elements s of variat a rupees: x= Number of units produced in order to eam profit (eiunit); V= Total variable cost in & (vx) ie cost/unit s Total sale or revenue in (sxx) rigevunit unit); 1.21 BreakEven Chart chart is a chart that shows tha sales volume level at hich total costs equal sz A break even cl l even point is the volume of production where total sales is equal to the total cost and organisation profit nor suffers loss. Itis also known as 0 profit and no loss point. Total sale = Total cost + profit Jotalsale = S= sx F+V=F+ve Profit = P. F+ve+P « sx= Fevx+P (s—Vr = F+P oot FP. S (s-v) Number of units produced for profit ‘P'. F+P xe (s-v) At BEP, Profit, P= 0 FA bee = —— units *eEP * Gv) ‘Volume of production (units) x —> Figure: Break even chart (BEP) ug = *epS= A standard machine tool and an ‘automatic machine tool are being compared for the production of component, Following data refers to the two machine el Fee = per piece [Hectine raio_|_€200nou | $8 ¢ 12.2 An Itis more profit business po 123 Cor Con costs and th treIndustrial anos Spey root ae What is the breakeven production batch size above automatic machine tool will be economical to use? nee (@) 111units (b) 101 units (©) 98.units (d) 91 units Solution: (a) 45, 25 TC) = ( 2 (70), 2 «200 (TO), = 25+22)a00 60 At BEP: (TC), = 45 | 25 *) a = (25+= i" (S+2x)200 +22) 800 eo 35) oo 6° 60 ~ 60 o 5x = 600-45 = 555 o x = 111units 1.2.2 Angle of Incidence (6) Itis the angle at which total sales line cuts the total cost line on break even chat. A larger @ indicates more profit at a higher rate. A larger angle of incidence at a high margin of safety marks extremely favourable business position. 1.2.3. Contribution Margin Contribution margin represents the portion of a products sales revenue that is not used up by variable costs and thus available to cover fixed expenses and provide profit to the company. Cost and sales me Volume of production ‘sales (units) Figure: Contribution margin on break even chart C.M, = Total sales - Total variable costs CM. = S-V=(s-W-x Contribution = (s- v) Itrepresents contribution of producing one more unit in our profit = (s~ v) Also, S=F+V+P S-V=F+P=CM OM =F+P=(s-v)x ‘Also known as marginal profit or gross margin.Mechanical : mrApe 4 Engineering —, 1.2.4 Profit-Volume Graph Proft ° ae ~ cu kL a ‘Volume of Production (units) Figure: Profit-volume graph sx=F+ve+P P= sx-vx-F=(8-v)x-F Atx = 0, loss will be maximum |. e., equal to fixed cost. 125 Profit-Volume Ratio a term used to represent profitability related to sales. This ratio always re (P/V) ratio: tis b dit is ratio of contribution margin to the volume of sales. It shows the rate: fora particular product an¢ increases with the increases in volume. cM (PV) aio = “5 For increasing the sales, highest (P/V), i. Product should be preferred. For decreasing the sales, lowest (PIV) i. Product should be preferred. If we want to increase the sales by 1 lakh rupees, then profit will increase maximum for the pred is having highest (P/V ) ae. AP Mao = 55 126 Margin of Safety (MOS) itis the difference of output at full capacity compared to output at break even point. Itis' between the expected level of sales and break-even sales, It helps in understanding cushion | company has and making decision about altering the selling price and investment to increase the: (MOS) .ai¢5 = (Sale), - (Sale) pep (M08) ae ™ 8, Shc Mos% = (SS) 100 ssmADE EASY EXAMPLE : 1.2 213 —$————Puniications Industrial Engineering Introduction & Break Even Analysis ‘A company requires a product for which they have 3 options (i) Purchase @ @10/unit (ii) Produce by semi-automatic machine; F = € 3400, v = & 6/unit (iii) Produce by fully automatic machine, F = & 20,200 v = ® 3/unit Find the decision rule. Solution: (i) Total cost = 10x x (i) Total cost = 3400 + 6x (ii) Total cost = 20,200 + 3x Taking (i) and (ii) and equating their total cost 10x = 3400 + 6x 3400 50, means after 850 units process (ii) will be more profitable. Taking (ii) and (iii) and equating their total cost 2 4x x 3400+ 6x = 20,200+3x; 3x= 16800 z= (220 See008 means after 5600 units process (ii) will be more profitable. Atay, (TC), = (TC)y 28000 10x = 3400+ 6x | = 4x = 3400 i x = 850%, 8 15000 Atx,, 3400 +6x = 20,2004+3x 8 = = 5000-9, 4 setae 0 1800001 senate that BEP can be lowered by either increasing V ~ 250-150 ; j 250 - 150 the selling price or decreasing the variable cost. = 1000 units 10. (b) Change in BEP = BEP,~ BEP, = 1000-1500 As BEP = aa = ~500 units eave ae chee oan MADE a Bn Epa www.madeeasypublications.org sont ecg (Ma