Decision Making

Break-Even Analysis
Make-or-Buy Decision
Decision Tree

In these Active Models we consider models that are useful for decision making. We use break-even analysis
both to analyze profitability and to determine whether to make or buy.

A decision tree, one of the models widely used for OM decisions, contains probabilities. Generally, probabilities
are estimates (forecasts) and there is much uncertainty associated with them. We explore the effects of the
probabilities on our decision.

Active Models to accompany Operations Management by Krajewski & Ritzman

0 SpreadsheeQuestion 4
1 Be If the fixed costs increase by 10% to $110,000, does the break-even quant 0
2 Be If the charge to patients increases by 10% to $220, does the break-even q 0
3 Be If the total variable costs increase by 10% to $110, does the break-even q 0
4 Be What would the procedure price need to be in order to have a break-even q 0
1 Make or BuIf the manager can decrease the fixed cost of making by 10% to $10,800, w 0
2 Make or BuIf the manager can negotiate a 10% (20 cents) reduction in the price of pr 0
3 Make or BuIf the fixed cost of buying could be eliminated, would the decision change 0
1 Decision tr If the probability of low demand increases, what happens to the total profit? 0
2 Decision tr For what range of probabilities of low demand would the better decision be to 0
3 Decision tr If the probability of a modest response (rather than a sizable response) to a 0
4 Decision tr How is the final decision affected by the probability of the response to adve 0

Active Models to accompany Operations Management by Krajewski & Ritzman

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Active Models to accompany Operations Management by Krajewski & Ritzman

 BE

Break-Even Analysis
Break-Even Analysis
Reset Data Questions $700,000
Fixed cost $100,000
per year $600,000

Variable costs $100 $500,000

per patient $3
$400,000
Procedure price $200
$300,000

Break-even quantity $200,000

units (patients) 1,000
dollars $200,000
$100,000

$0
Compared to 1,000 0%
0 500 1000 1500 2000 2500 3000 3500 4000
Patients
Total Annual Costs Total Annual Revenues

Active Models to accompany Operations Management by Krajewski & Ritzman

 Make or Buy

Make-or-Buy Decision

Reset Data Questions Make-or-Buy Analysis

$140,000
Fixed Cost Variable Cost
Make $12,000 $1.50 $120,000
$76
$100,000
Buy $2,400 $2.00
$80,000

Point of Indifference $60,000

Make vs. Buy 19,200 salads
$40,000
Compared to 19,200 0%
$20,000

$0
0 10000 20000 30000 40000 50000 60000 70000
Units (Salads)
Make Buy BEP

Active Models to accompany Operations Management by Krajewski & Ritzman

Decision Tree
Reset Data Questions
0.40
200
Small Facility Low demand

$ 242.00 Don't expand

223
0.6
2
High demand $ 270.00 Expand
270
2
$ 544.00 Do nothing
40
Decision: Large facility
0.4
2 0.30
Low demand $ 160.00 Modest response
Advertise 20

Large Facility $ 160.00 0.7

Sizable response
$ 544.00 220
0.6
800
High demand

Active Models to accompany Operations Management by Krajewski & Ritzman