Krajewski IN Supplement A - Supplement A Decision Making A...

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Supplement A Decision Making A. Break-even Analysis 1. Evaluating services or products a. We assume total costs equals fixed costs; which do not vary with volume, plus variable costs; which vary linearly with volume. b. Introduce with Example A.1: Finding the Break-Even Quantity Algebraic approach: c p F Q cQ F pQ - = + = c. Break-even quantity: Graphic Approach (refer to Figure A.1 and show PowerPoint). d. Sensitivity analysis with Example A.2 2. Application A.1: Finding the Break-Even Analysis for Evaluating Products or Services for an in-class exercise of graphical solution, algebraic solution, and sensitivity analysis. (Note: The expected demand increase is not quite enough to break even.) The Denver Zoo must decide whether to move twin polar bears to Sea World or build a special exhibit for them and the zoo. The expected increase in attendance is 200,000 patrons. The data are: Revenues per Patron for Exhibit Gate receipts $4 Concessions $5 Licensed apparel $15 Estimated Fixed Costs Exhibit construction $2,400,000 Salaries $220,000 Food $30,000 Estimated Variable Costs per Person Concessions $2 Licensed apparel $9 Is the predicted increase in attendance sufficient to break even? A-1
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A-2 Supplement A Decision Making a. Graphical solution of Denver Zoo problem Q TR = pQ TC = F + cQ 0 $0 $2,650,000 250,000 $6,000,000 $5,400,000 Where p = 4 + 5 + 15 = $ 24 F = 2,400,000 + 220,000 + 30,000 = $ 2,650,000 c = 2 + 9 = $ 11 b. Algebraic solution of Denver Zoo problem pQ = F + cQ 24 Q = 2,650,000 + 11 Q 13 Q = 2,650,000 Q = 203,846 3. Evaluating processes a. We assume that the make versus buy or process 1 versus process 2 decision does not affect revenues.
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Supplement A Decision Making A-3 b. The decision alternative is indicated on the basis of the lowest total costs at the expected volume. c. Use Application A.2: Evaluating Processes: Make or Buy Example At what volume should the Denver Zoo be indifferent between buying special sweatshirts from a supplier or have zoo employees make them? Buy Make Fixed costs $0 $300,000 Variable costs $9 $7 m b b m c c F F Q - - = B. Preference Matrix The preference matrix is used where multiple criteria cannot be merged into a single measure such as dollars.
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