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NOTES ON BREAK EVEN POINTS Break Even Points - the number of goods, products, or services that must be produced to equate total revenue (TR) to total cost (TC). When a firm breaks even, it is not loosing money nor is it making money. Therefore, break even points depict a situation where profit (a) is zero or 1= TR - TC = 0. Formula for Calculating Break Even Points - here is the formula for calculating break even points BEP - FC/(P-AVC). There are three pieces of information that you need in order to calculate break even points: fixed cost (FC), price (P), and average variable cost (AVC). Let's do an example problem. This is problem of a small craft shop that repairs springs for wall clocks. Here are the data or parameters that are present in the shop's books: AVC = $3 FC - $1,000 P = $8. Now, just plug the data into the formula. There is nothing tricky about this type of calculation, BEP = $1,000 / (88 - $3) BEP = $1,000 $5 BEP = 200 springs or units This clock repair shop must repair 200 springs to break even. Remember that this result is in PRODUCTION UNITS: NOT DOLLARS. This is a very simple but important formula to know. In fact, you must do a break even analysis for your Senior Project (business plan). Keep that in mind. Operations Management U.S. RTE Cold Cereal Market Break-even Analysis Background (Kiplinger News) Although the U.S. ready to eat (RTE) cold cereal market has been losing sales over the last 5 to 8 years or so, it is still very profitable. In 2018, the industry earned about $8.5 billion in sales. The industry is highly oligopolistic in that just four (4) firms: General Mills (GM), Kellogg (K), Post Holdings (PH), and Quaker Foods (PepsiCo) (Q) account for $7.5 billion of those sifies. Managerial Decision You work as an operations management consultant for a firm that manufactures cooking ovens for the RTE cereal industry (for processing grains into flakes and biscuit squares). Your firm is thinking about expanding its operations and wants to invest in some new equipment for manufacturing ovens. Your bosses come to you and ask you to determine if the expansion plan is feasible. You need to do some analyses to determine if the U.S. cereal industry is growing at adequate enough rates to warrant the investment. Based on your calculations, the results indicate that a cereal manufacturer must produce anywhere from 22,000 boxes to 30,000 boxes of cereal a week for your firm to take on the expansion project (because the ovens that your fimm manufactures are within that range of capacity). Cost According to some unverified sources, the regular 15 oz. box of cereal (with basic nutritional value has the following costs: 0.70 (basic cost); 0.32 (cost of the outer carton and inner polymer liner bag); and $48,000 (weekly fixed cost) Ranking of Top 10 RTE Cereal Brands ( US) (Kiplinger News) 2018 1.Cheerios (GM); Sales: $435.9m; Quantity Sold (QS): 139.1 million boxes (mb): Average Price (P): $3.13 2.Honey Nut Cheerios (GM); Sales: $421m; QS: 129.3mb; P: $3.26 3.Frosted Flakes (K): Sales: $412.6m; QS: 132.3mb; P: $3.12 4. Honey Bunches of Oats (PH); Sales: $375.2m; QS: 113.3mb; P: $3.37 5.Cinnamon Toast Crunch (GM); Sales: $344.3m; QS: 105.2mb; P: $3.27 6.Lucky Charms (GM); Sales: S283.4m; QS: 86.4m; P: $3.28 7.Froot Loop (K), Sales: $269.1m; QS: 91.7m; P: 2.93 8.Frosted Mini Wheats (K); Sales: $241.9m; QS: 71.3m; P: $3.40 9. Life (Q): Sales: $177.5m; QS: 58.1m: P: $3.06 10.Fruity Pebbles (PH); Sales: $172m; QS: 54.1m, P:$3.19 Assignment/Project Using the cost information given to you, calculate Break-even Points for the entire ranking of cereals Show your all of your calculations. Make sure that your work is organized and neat Based on your results, explain your decision to either invest or not. Be detailed with your explanation, but be brief