Question

An order for 200 of a product is processed on operation A and operation B. The setup time on A is 100 minutes, and the run time per piece is 18 minutes. The setup time on B is 60 minutes, and the run time is 12 minutes per piece. It takes 30 minutes to move a lot between A and B. Since this is a rush order, it is given top priority (president’s edict) and is run as soon as it arrives at either workstation. It is decided to overlap the two operations and to split the lot of 100 into two lots of 100 and 20. When the first lot is finished on operation A, it is moved to operation B where it is set up and run. Meanwhile, operation A completes the balance of the 100 units (40) and sends the units over to operation B. These 60 units should arrive as operation B is completing the first batch of 60; thus, operation B can continue without interruption until all 200 are completed. Complete the operation setup and describe if there are any flaws?

2) 1)     What is break-even analysis?

a) What are the advantages and disadvantages of using it to calculate break-even points?

b) What could be the likely sources of errors in break-even analysis?

Answer 1

2) 1) Break even analysis is a techniques used by production management and management accountants. It is a financial tool that helps us to to understand that at what stage the company or business or an new product or service becomes profitable. Basically it helps us to determine the number of product or services to be sold to cover the costs incurred. Break even is a stage where the company or the business is not making any profit or loss but it is able to cover all its costs.\

Break even analysis is important to study the relationship between the variable costs, fixed costs and revenue. A company with low fixed cost will have a low break even point. For example a company having fixed cast equal to $0, will have its break even at the sale of its first product.

a) Advantage of Break-Even analysis

• Break-even analysis helps in measuring profits and losses at different stages
• It helps in predicting the impact of changes in the selling price
• It lets one analyse the relationship between the variable cost and fixed cost.
• It also predicts the effect of changes in cost and efficiency on profitability

Disadvantages of Break-Even analysis

• It assumes that the sale prices is constant at all points, which not always true hence it leads to errors in the calculation break-even
• It assumes that the production and the sales are the same, i.e. , it considers that all the products produced are sold, which is not true every time, there are possibilities of unsold outputs.
• Preparation of break even charts can be very time consuming and might not be very accurate leading to faulty results.
• This technique can be applied to only single product or single product mix.

c) Sources of errors in break even analysis are:

• Improper calculation of Fixed costs by missing out some important elements. For example, interest paid on loans should be a part of fixed cost but it is shown as expense in the profit and loss account.
• Assumption of selling price to be constant results in an error, because the SP keeps fluctuating depending on the demand and supply.