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The document analyzes three proposals for supplying a critical component for a company's new electric watercraft line. Proposal 1 is to purchase the component, 2 is to make it in-house using rebuilt equipment, and 3 is to purchase new automated equipment. Break-even analysis is used to determine the quantity range at which each proposal would be preferred. Proposal 1 is preferred below 45,000 components, proposal 2 between 45,000-87,500 components, and proposal 3 above 87,500 components annually based on the costs.

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384 views2 pages

1: More Info

The document analyzes three proposals for supplying a critical component for a company's new electric watercraft line. Proposal 1 is to purchase the component, 2 is to make it in-house using rebuilt equipment, and 3 is to purchase new automated equipment. Break-even analysis is used to determine the quantity range at which each proposal would be preferred. Proposal 1 is preferred below 45,000 components, proposal 2 between 45,000-87,500 components, and proposal 3 above 87,500 components annually based on the costs.

Uploaded by

om
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Download as PDF, TXT or read online on Scribd
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A2: CH 2--Process Strategy-Nawaf Basudan https://xlitemprod.pearsoncmg.

com/api/v1/print/om

Instructor: John Bing


Student: Nawaf Basudan Assignment: A2: CH 2--Process
Course: BUA 345--Operations & Supply
Date: 05/25/19 Strategy
Chain Management

The operations manager at Sebago Manufacturing is considering three proposals for supplying a critical component for its
new line of electric watercraft. Proposal one is to purchase the component, proposal two is make the component in-house
using rebuilt equipment, and proposal three is to purchase new, highly automated equipment. The costs associated with
each proposal are provided in the table below. At what quantity range will each option be preferred?
1
Click the icon to view the costs associated with each proposal.

To evaluate an idea for a new service or product, or to assess the performance of an existing one, determining the volume
of sales at which the service or product breaks even is useful. The break-even quantity is the volume at which total
revenues equal total costs. Use of this technique is known as break-even analysis. Break-even analysis can also be used to
compare processes by finding the volume at which two different processes have equal total costs.

The variable cost, c, is the portion of the total cost that varies directly with volume of output: costs per unit for materials,
labor, and usually some fraction of overhead. If we let Q equal the number of customers served or units produced per year,
total variable cost = cQ. The fixed cost, F, is the portion of the total cost that remains constant regardless of changes in
levels of output: the annual cost of renting or buying new equipment and facilities (including depreciation, interest, taxes,
and insurance); salaries; utilities; and portions of the sales or advertising budget. Thus, the total cost of producing a service
or good equals fixed costs plus variable costs multiplied by volume, or

Total cost = F + cQ.

Solve the following equation to find the break-even quantity for the proposals one and two.

F1 + c1 Q12 = F2 + c2 Q12

F2 − F1
Q12 =
c1 − c2
$225,000.00 − $0.00
=
$22.00 − $17.00
= 45,000 components per year

Find a solution of the following equation to find the break-even quantity for the proposals two and three.

F2 + c2 Q23 = F3 + c3 Q23

F3 − F2
Q23 =
c2 − c3
$400,000.00 − $225,000.00
=
$17.00 − $15.00
= 87,500 components per year

Solve the following equation to find the break-even quantity for the proposals one and three.

F1 + c1 Q13 = F3 + c3 Q13

F3 − F1
Q13 =
c1 − c3
$400,000.00 − $0.00
=
$22.00 − $15.00
= 57,143 components per year

Proposal one will provide the lowest annual cost if between 0 and 45,000 components are required annually.

Proposal two will provide the lowest annual cost if between 45,000 and 87,500 components are required annually.

Proposal three will provide the lowest annual cost if greater than 87,500 components are required annually.

1: More Info

1 of 2 25-05-19, 07:18 pm
A2: CH 2--Process Strategy-Nawaf Basudan https://xlitemprod.pearsoncmg.com/api/v1/print/om

 
  
 
Annual cost of capital Variable cost of each
Proposal
required component
One: purchase $0.00 $22.00
Two: make with rebuilt equipment $225,000.00 $17.00
Three: make with new equipment $400,000.00 $15.00

2 of 2 25-05-19, 07:18 pm

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