Chapter 13Breakeven and Payback Analysis13.1 Breakeven analysis for a single project In this section it is mainly focus on method to determine the breakeven analysis when engineering economy is not known such as P, F, A, i or n. On the other hand breakeven analysis also can be calculated by equating both PW and AW equal to zero to determine i* = 0. Despite using two method above there is one more alternative for determining breakeven quantity QBE for one parameter or decision available. Breakeven analysis is defines as an analysis to find a similar parameter between two elements. Breakeven analysis is fundamental to evaluations such as make-buy decision.The one important parameter that needs to find is Q. This parameter can be in various unit i.e. units/year, cost/kilogram, hours/month and etc. QBE is defines as Breakeven Quantity can be determined from mathematical relations between cost and revenue of a product. There are two components in cost. Fixed Cost (FC) and Variable Cost (VC). The difference between FC and VC is variable cost will change with production level, work force size and other factor whereas for FC it will stay constant with factor mentioned. FC + VC = Total cost.As mentioned before Q is decision variable. If Q > QBE therefore it will be profit investment. If Q < QBE there is a loss. QBE = where, r = revenue/unit and v = variable cost/unit.13.2 Breakeven analysis between two alternativesFor this section we will discuss breakeven analysis between two mutually exclusive alternatives. Selection of the alternative is different depend on two facts; slope variable cost curve and parameter value relative to the breakeven point. Method to select base on slope variable cost is to create graph of total cost for both alternatives and find the intersection total cost lines indicating the breakeven point and the variable cost establishes the slope. If the number of units of the common variable is greater than breakeven amount therefore select alternative that has lower slope and vice versa. Instead of plotting graph between two total cost. There is another method where using AW or PW relation for each alternative as a function of the common variable. Equate the two relations and solve for the breakeven value of the variable. The breakeven analysis approach is commonly used for make-or-buy decision. This means the company contracts to buy the product or service from the outside, or makes it within the company. The alternative to buy has no fixed cost but larger variable cost.13.3 Payback AnalysisPayback analysis used PW technique to determine amount of time, usually in years unit to recover the first cost of an asset or project. Payback period also called payback or payout period. There are two types payback analysis, first is no return i = 0% also called simple payback. Second is Discounted Payback : i > 0% in this method time value of money is considered. Type of NCF also needs to be considered for first payback analysis where NCF can be varied annually and uniform NCF. Same goes for discounted payback. When involving two or more alternatives are evaluated using payback analysis is economically incorrect. It is advised to use PW or AW analysis method.

QuestionCyberCheme Industries is producer of an organic chemical liquid for plastic manufacturing. The liquid produced has high melting temperature cause the plastic manufactured has high melting point. The fixed costs associated producing this liquid is RM 800,000 per year. If a base (unit/1000 liter) sells for RM 4000 per year and its variable cost is RM 3500 (unit/1000 liter)(a) How many liters need to be sold each year for breakeven(b) What will the profit be for sales of 3000 unit = (3,000,000 liters) per year.

Answer :(a)Determine QBE

= units = 1.6 million liters per year.

(b)R= 3000 units x r = 3000 x 4000 = RM 12,000,000Profit = R TC = R (FC+VC)FC = RM 800,000VC = RM 3500 x 3000 units = RM 10,500,000Therefore,Profit = RM 12,000,000 (RM800,000 + RM 10,500,000) = RM 700,000.