Chapter 1: Goods Services, and Operations Management Although other factors, such as the competence of the phone representatives, in- fluence satisfaction, the model clearly suggests that satisfaction decreases the longer a customer remains on hold. The average time on hold is approximately 300 sec- onds, and the average satisfaction rating is 3.0. The model suggests that a reduc tion in the time on hold by 100 seconds will improve the satisfaction rating by 0.7. To improve customer satisfaction, the manager of the call center operation might change staffing policies to increase the number of customer service representatives during peak call times or exploit technology that informs customers of the antici pated wait time and allows them to hold or defer the call to a later time. In fact, research has shown that customers are willing to wait longer on hold without be- ing dissatisfied if they know the length of the wait in advance. A Break-Even Model An industrial electronics manufacturer is considering expanding its production fa- cility to manufacture an electrical component. To assess the value of the expansion, the plant manager has been asked to determine how many units would have to be produced and sold in order to break even. The cost for new equipment and instal- lation is $100,000. Each unit produced would have a variable cost of $12 per unit and sell for $20. The equation for total cost is Total cost Fixed cost + Variable cost The fixed cost is that portion of total cost that does not vary with the amount pro- duced. If 10,000 units were produced and sold, the total cost would be Total cost $100,000 +$12(10,000) $220,000 The revenue received from selling 10,000 units would be $20(10,000)-$200,000, so at this production level, the firm would incur a loss of $220,000 $200,000 $20,000. However, if 13,000 units were produced and sold, the projected profit would be $20(13,000) $100,000 $12(13,000) $4,000, The amount of sales at which the net profit is zero--or equivalently, the point where total cost equals total revenue-is called the break even point. We can find the break-even point by developing a simple mathematical model. Let x be the sales volume at the break-even point. Then, Total cost 100,000+ 12x- Total revenue 20xx Setting the total revenue equal to total cost we have 20x and hence 100,000 + 12x 12,500/ If sales are less than 12,500 units, the firm will incur a loss; if sales are more than 12,500, it will realize a profit. Such information, when combined with sales fore- casts, can assist the manager in deciding whether or not to pursue the expansion. Exhibit 1.10 shows a spreadsheet model for this situation. An Excel data table, shown in columns D and E, provides a simple way of identifying the break-even point. We can also conduct simple sensitivity analyses to investigate the impact of changes in the model data inputs on the result. For example, Exhibit 1.11 shows another Excel data table in which the variable cost is changed at the break-even level of 12,500 units. If the plant manager can lower the variable cost through some type of operations improvements, we can easily see the effect on profitability. How ever, if costs rise, then the firm will incur a loss. The amount of sales at which the net profit is zero-or equivalently, the point where total cost equals total revenue-is called the break- even point. 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 (x) is zero or -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 P=S8. FC = $1,000 Now, just plug the data into the formula. There is nothing tricky about this type of calculation, BEP $1,000/($8 - $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 sites. 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 firm 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 (U.S) (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: $283.4m; 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:S3.19 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