Transcript IE285e, Lecture #4, Fixed and Variable Costs, Excel.ppt

Integrative Project in Modern
Production Methods (IE285e)
Lecture #4
19 September, 2005
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Production Methods, IE285e
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Topic:
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Company Economy:
Expenses: Fixed and Variable costs;
Income
Break-Even
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Production Methods, IE285e
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Company Expenditures
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Fixed Costs: the costs that do NOT
depend on the production volumes.
Variable costs: the costs that DO depend
on the production volumes.
This separation is slightly arbitrary.
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Production Methods, IE285e
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Fixed Costs
• Space (building, land)
related: rental, building
maintenance, property tax.
• Equipment, technology,
depreciation and
maintenance.
• Part of Environmental
expenses: e.g. scrubbers.
• Indirect labor: Research
and Development,
Engineering, Quality and
test groups.
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• Administration.
• Part of the Direct Labor,
could be up to 100%.
• Part of power consumed,
many cases up to 100%.
• Product support:
warranty services, after
warranty services.
• Marketing
• Cost of Finance:
Principal and Interest
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Production Methods, IE285e
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Variable Costs
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Materials used.
Power consumed.
Shipment related: packaging, transportation.
Seasonal Direct Labor.
Part of Equipment Maintenance and
Depreciation
• Part of Environmental expenses: e.g. filters.
• …
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Business time scope
• Each business and manufacturing should
have a time scope, related:
• A) to marketing horizon;
• B) technology duration, equipment
depreciation;
• C) - A) and B) depend on the stage of the
lifecycle (introduction, growth, maturity,
decline, withdrawal).
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Pricing strategy
• Mostly depends on market situation:
• Well known and respected companies may
command high prices.
• Dumping tactics dictates lower prices.
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Break Even
• Having the expenses, the time scope and
pricing logic, one calculates the relationship
between needed sales volumes that for the
particular pricing strategy will provide
break even in the particular time duration:
Sales = Price x N = Expenses
• N, number of sold items, should be related
to a period of time @ a given capacity of
the operation.
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Software
• Excel is one of the best software packages
for this type of calculation when writing a
business plan,
• Or when making any preliminary
assessments and calculations.
• It is also a great tool for making
technological/business decisions.
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Production Methods, IE285e
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