Tag: break-even analysis

Guest Post: A Breakeven Analysis Using Real Data

Our Guest Post today comes from Howard Weiss, who is Professor of Operations Management at Temple University. Howard has developed both POM for Windows and Excel OM for our text.

I like to direct my students to real data whenever possible in my Operations Management course. The Philadelphia Inquirer (http://www.philly.com/philly/blogs/inq-phillydeals/grateford-phoenix-prison-400-million-new-20170915.html) has an article about a new prison, Phoenix, that is being built in Pennsylvania to replace the old prison, Graterford. Phoenix is expected to open in July, 2018. The article gives data that makes it very easy to formulate a break-even example for the students.

According to the article, Phoenix cost $400 million to build, will cost $90 per day to house an inmate and will have 4055 beds. Currently at Graterford it costs $123 per day per inmate.

I have asked my students to determine the following:
1. What is the total savings per year assuming the prison operates at 100% capacity?
2. Why is this different from the $48 million dollars reported in the article? Assume the costs given above are correct.
3. How many years will it take until the Phoenix project breaks even based on the $48 million reported in the article?

I expect my students to:
1. compute the savings per inmate per day ($33); the savings per inmate per year ($12,045); the total savings per year? $48,842,475
2. realize that the prison does not operate at full capacity and hopefully to report that the effective capacity is 98%.
3. compute the break-even point in years (8.33 years).

 

Guest Post: Break-even Analysis: Excel Makes Algebra Obsolete

Our Guest Post today comes from Howard Weiss, who is Professor of Operations Management at Temple University. Howard has developed both POM for Windows and Excel OM for our text.

When I began to use Excel in my classes, my main objective was to make the computations easier for the students so that we could focus on the models, inputs and outputs. At this point though, I have changed my priorities and I think it is important for us as OM (or Finance or Stat) professors to help the students develop their Excel skills as best as we can in our courses. To that end, I have taken a different approach to teaching Breakeven Analysis.

In the past, I used to develop the Break-even point algebraically just as is done in Heizer/Render/Munson and just about every other OM or business textbook. At the computer lab I would have my students enter into Excel the Fixed cost, Variable cost, Price and then the formula for the break-even point F/(P-V).

Recently, I have instead used Goal Seek, rather than the formula, to have the students find the break-even point. Instead of entering the break-even formula, I have them create a cell for the number of units, a cell for the total revenue and a cell for the total cost based on the number of units. I think expressing the total cost and total revenue in Excel helps the student to better understand these two admittedly simply concepts. I then tell the students that instead of finding the number of units where TC = TR we will create a cell for the difference between the two and use Goal Seek to search for a difference of 0 between TC and TR. The spreadsheet for Example S5 (Supp. 7) in the textbook appears as follows, along with a capture of the Goal Seek window.

I think this approach gives the student a better understanding of both break-even analysis and Goal seek.

Teaching Tip: Computing Break-Even for an Airline Flight

 At what price does an airline break-even when it sells you a ticket to fly from Point A to Point B? It’s an interesting question and makes a good example for covering break-even in Supp.7 (see Figure S7.5).

Fortune  (March 23,2011) just provided an excellent analysis, along with an interactive pie chart that allows you to alter the price of fuel. It takes Delta’s flight from Los Angeles to La Guardia (NY), with a brief layover in Detroit, as its basis. With the average price of a one-way ticket (including 1st class) on this particular flight of $506, Delta was making a $33 profit per ticket in 2010. When fuel was pre-Mideast instability  jitters just a few months ago, $98 of the cost was in that one item, the largest of all costs incurred.

Today, the profit is down to $4! Fortune makes the point that if you fly coach on a competitive route, the carrier is probably in the red. (Hello baggage, pillow, and food fees).

Here is the cost breakdown: Labor ,$95; Plane rent/ownership, $26; Non-plane rents,$17; Nonemployee labor, $32; Payments to partners, $54; Interest, $12; Taxes/fees, $75; Other/misc., $63.

As the flight begins, with a 23 min. boarding time and a 24 min. taxi to the runway, Delta has already spent over $1,000 in labor, fuel, and maintenance. Flying to the layover in Detroit costs $11,674, and getting to the gate another $309.

I think using the interactive fuel price graph makes a point that any flying student will appreciate.