ELEMENTS OF COST

(Estimation of Product Cost)

Problems on Selling Price Determination
Process Planning
 Process Selection

Product design considerations must include the

process
Intermittent processes:
Processes used to produce a variety of products
with different processing requirements in lower
volumes. (such as healthcare facility)
Repetitive processes:
Processes used to produce one or a few
standardized products in high volume. (such as a
cafeteria, or car wash)

22
Types of processes

23
 Process Types
Process types can be:
Project process make a one-at-a-time product
exactly to customer specifications
Batch process small quantities of product in
groups or batches based on customer orders or
specifications
Line (Mass) process large quantities of a
standard product
Continuous process very high volumes of a fully
standard product
Process types exist on a continuum

24
Intermittent VS. Repetitive Facility Layouts

25
Break Even Analysis
Break-Even Analysis
 Break-Even Analysis

Total cost = fixed costs + variable costs (quantity):

TC F VCQ
Revenue = selling price (quantity)

R SPQ
Break-even point is where total costs = revenue:

TC R or F VC Q SPQ
F
or Q
SP VC
 Break-Even Analysis Example

A firm estimates that the fixed cost of

producing a line of footwear is $52,000 with a
$9 variable cost for each pair produced. They
want to know:
If each pair sells for $25, how many pairs must
they sell to break-even?
If they sell 4000 pairs at $25 each, how much
money will they make?
 Solution for the Example
Break-even point:
F $52,000
Q 3250 pairs
SP VC $25 $9
Profit = total revenue total costs

P SPQ F VC Q
$254000 $52,000 $94000
$12,000
Break Even Quantity (BEQ)
 Breakeven Between Two Alternatives
To determine value of common variable between 2 alternatives, do the
following:
1. Define the common variable
2. Develop equivalence PW, AW or FW relations as function of common
variable for each alternative
3. Equate the relations; solve for variable. This is breakeven value

Selection of alternative is based on

anticipated value of common variable:

Value BELOW breakeven;

select higher variable cost

Value ABOVE breakeven;

select lower variable cost