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Chapter 13
Breakeven and Payback Analysis
Of course, no static R and TC relations—linear or nonlinear—are able to estimate exactly the revenue and cost amounts over an extended period of time. But the breakeven point is an excellent target for planning purposes.
EXAMPLE 13.1 Indira Industries is a major producer of diverter dampers used in the gas turbine power industry to divert gas exhausts from the turbine to a side stack, thus reducing the noise to acceptable levels for human environments. Normal production level is 60 diverter systems per month, but due to significantly improved economic conditions in Asia, production is at 72 per month. The following information is available. Fixed costs Variable cost per unit Revenue per unit
FC 5 $2.4 million per month v 5 $35,000 r 5 $75,000
(a) How does the increased production level of 72 units per month compare with the current breakeven point? (b) What is the current profit level per month for the facility? (c) What is the difference between the revenue and variable cost per damper that is necessary to break even at a significantly reduced monthly production level of 45 units, if fixed costs remain constant?
Solution (a) Use Equation [13.2] to determine the breakeven number of units. All dollar amounts are in $1000 units. FC QBE 5 ——— r2 v 5
2400 5 60 units per month 75 2 35
Figure 13–4 is a plot of R and TC lines. The breakeven value is 60 damper units. The increased production level of 72 units is above the breakeven value.
7000 Revenue line 6000
5000
$1000
4500 4000
Profit Total cost line
3000 2400 2000
1000 QBE = 60