2 Decisionmaking 121219225114 Phpapp02

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    Dec is ion Making

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    Overview

    Break-Even Analysis

    Preference Matrices

    Payoff Tables (Decision Tables)

    Decision Trees

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    Break-Even Analys is

    Break-even analysisis used to compare processesby finding the volume at which two differentprocesses have equal total costs.

    Break-even pointis the volume at which totalrevenues equal total costs.

    Variable costs (c)are costs that vary directly withthe volume of output. (EG: material costs, labor, etc.)

    Fixed costs (F)are those costs that remain constantwith changes in output level. (EG: Insurance, rent,property taxes, etc.)

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    Break-Even Analys is

    Gives you a comparison of Revenues andTotal Costs over a range of operations/output.

    Assumes all changes are linear

    Fixed Costs(F) are assumed to be level andconstant as output changes.

    Variable Costs(c) are assumed to change linearlywith output.

    Revenuesare assumed to change linearly withoutput.

    In reality, no changes are linear, but thetechnique can still be helpful.

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    Break-Even Graph

    Dollars

    Volume of Output (Q)

    Fixed Costs

    Total Costs

    Total Revenues

    Break-Even Point

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    Break-Even Analys is

    in the real world .

    Fixed costsincrease incrementally as outputcapacity increases.

    As capacity increases, periodic expansion of plantand equipment is required, insurance cost andtaxes increase

    Variable Costincrease is curvilinear asoutput production increases.

    As you purchase greater quantities of materials,you usually get quantity discounts.

    Revenueincrease is curvilinear as outputincreases. Quantity discounts are given to larger sales.

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    The Compl icat ions o f

    Non-l ineari ty

    Dollars

    Volume of Output (Q)

    Fixed Costs

    Variable Costs

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    Qis the volume in units

    cis the variable cost per unit

    Fis the total fixed costs

    pis the revenue per unit

    cQis the total variable cost.(Variable cost per unit x Volume)

    Total cost = F+ cQ (Fixed costs + total Variable costs) Total revenue = pQ (Revenue per unit x Volume)

    Break even is where Total Revenue = Totalcosts: pQ = F+ cQ

    Break-Even Analys is(You dont need the formula for exams.)

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    Break-Even Analys is

    can tell you

    ...if a forecast sales volume is sufficient to make

    a profit, or at least cover your costs.

    ...how low your variable cost per unit must be tobreak even, given current product price and

    sales-volume forecast.

    ...what the fixed cost need to be to break even.

    ...how price levels affect the break-even volume.

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    Hosp ital Example

    A hospital is considering a new procedure to be offered,billed at $200 per patient. The fixed cost (F) per year is

    $100,000, with variable costs at $100 per patient.

    How many patients do they need to cover their costs?(I.E. what is the break-even level for this service?)

    Q= F/ (p- c) = 100,000/ (200-100) = 1,000 patien ts

    Where Q= total # of patients; F= fixed costs; p= revenue per unit;

    c= variable costs per patient

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    Using Excel Solver

    Select the Break-Even solver model on the L-Drive(under my name)

    Select MGT 360

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    Using Excel Solver cont.

    Select Excel Solver Models

    Select the Break-Even

    Analysis model.

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    Enabling the Macros

    Mac

    PC

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    Running The Model

    You will get this screen whether you enable themacros or not, but your answer wont be correct if

    you dont enable them.

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    Total Costs

    Total Revenue

    Using the Excel Solver,enter the data requestedin the yellow blocks, andthe answer will appear inthe green block, alongwith the chart.

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    Patients (Q)

    Dollars

    | | | |

    500 1000 1500 2000

    Quantity Total Annual Total Annual

    (patients) Cost ($) Revenue ($)

    (Q) (100,000 + 100Q) (200Q)

    0 100,000 02000 300,000 400,000

    Hosp i tal Examp le(solved using graphical method)

    40,000

    30,000

    20,000

    10,000

    0

    Q tit T t l A l T t l A l

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    40,000

    30,000

    20,000

    10,000

    0

    Patients (Q)

    DOLLARS

    | | | |

    500 1000 1500 2000

    (2000, 40,000)

    Total annual revenues

    Quantity Total Annual Total Annual

    (patients) Cost ($) Revenue ($)

    (Q) (100,000 + 100Q) (200Q)

    0 100,000 02000 300,000 400,000

    Q tit T t l A l T t l A l

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    Quantity Total Annual Total Annual

    (patients) Cost ($) Revenue ($)

    (Q) (100,000 + 100Q) (200Q)

    0 100,000 02000 300,000

    400,000

    Total annual costs

    Patients (Q)

    DOLLARS

    | | | |

    500 1000 1500 2000

    Fixed costs

    (2000, 40,000)

    (2000, 30,000)Total annual revenues

    40,000

    30,000

    20,000

    10,000

    0

    Q tit T t l A l T t l A l

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    Total annual revenues

    Total annual costs

    Patients (Q)

    | | | |

    500 1000 1500 2000

    Fixed costs

    Break-even quantity is 1000 patients

    (2000, 40,000)

    (2000, 30,000)

    Profits

    Loss

    Quantity Total Annual Total Annual

    (patients) Cost ($) Revenue ($)

    (Q) (100,000 + 100Q) (200Q)

    0 100,000 02000 300,000 400,000

    DOLLARS

    40,000

    30,000

    20,000

    10,000

    0

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    40,000

    30,000

    20,000

    10,000

    0

    Total annual revenues

    Total annual costs

    Patients (Q)

    | | | |

    500 1000 1500 2000

    Fixed costs

    Profits

    Loss

    Sens i tiv i ty Analys is

    Forecast (Q) = 1,500

    pQ(F+ cQ)

    200(1500)[100,000 + 100(1500)]

    = $5,000 profit

    Per-patient cost of theprocedure.

    DOLLARS

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    Two Processes and

    Make-o r-Buy Dec is ions

    Breakeven analysis can be used to choosebetween two different processes

    Also can be used to decide between using an

    internal process or outsourcing that processservice.

    The solution finds the point at which the totalcosts of each of the two processes are equal.

    A forecast of sales (volume level) is thenapplied to see which alternative (process)has the lowest cost for that volume.

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    Two-Process Example

    Process #1 fixed costs for makingwidgets is $12,000, and the variablecost is $1.50 per unit.

    Process #2 fixed costs for makingwidgets is $2400 and the variable costis $2.00 per unit.

    If expected demand is 25,000 widgets,which process is less expensive?

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    Breakeven for

    Two Processes

    For any volume above 19,200units, Process #1 should beused.

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    Q=FmFb

    cbcm

    Q=12,0002,400

    2.01.5

    Breakeven for

    Two Processes

    Q = 19,200

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    An analysis that allows you to rate alternatives byquantifying tangible and/or intangible criteria.

    Criteria are ranked and weighted for eachalternative being evaluated.

    Each score is weighted according to its perceivedimportance to you, with the total weights typicallyequaling 100.

    Thus it measures your preference.

    Alternative with highest sum of the weightedscores is the one you most prefer.

    Preference Matr ix

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    Using the

    Preference Matrix(A hyp othet ical example)

    Problem: Where to go to dinner.