Breakeven production rate

The breakeven production rate Rb is defined by Eq. (9-13) as the produc tion rate at which the project makes neither a profit nor a loss. Equation (9-13) and (9-229) can be combined to give... 

Breakeven charts present a snapshot of the present situation by means of graphs which are generally drawn in the manner shown in Figs. 9-2, 9-3, and 9-4. Since the lines are straight, this implies that Cs, Cy , and Aee will remain constant over the range of variation of R, which is of interest. The values would be based on the production rate currently achieved (or scheduled), since all the data are available from... 

A chemical manufacturing company sells three products and has found that its revenue function is / = 10 + 4 Ay2 + 2z, where, y, and z are the monthly production rates of each chemical. It is found from breakeven charts that it is necessary to impose the following limits on the production rates ... 

If the project gets a free ride, i.e., iiApE is zero, then T takes on its maximum possible value of unity. Conversely, if the project and its production rate are only at the breakeven point, then T becomes zero. Therefore, contribution efficiency can be regarded as a measure of the probability of success for the project. 

Figure 2.2 shows the cash flow pattern for a typical project. The cash flow is a cumulative cash flow. Consider Curve 1 in Figure 2.2. From the start of the project at Point A, cash is spent without any immediate return. The early stages of the project consist of development, design and other preliminary work, which causes the cumulative curve to dip to Point B. This is followed by the main phase of capital investment in buildings, plant and equipment, and the curve drops more steeply to Point C. Working capital is spent to commission the plant between Points C and D. Production starts at D, where revenue from sales begins. Initially, the rate of production is likely to be below design conditions until full production is achieved at E. At F, the cumulative cash flow is again zero. This is the project breakeven point. Toward the end of the projects life at G, the net rate of cash flow may decrease owing to, for example, increasing maintenance costs, a fall in the market price for the product, and so on.

This situation would represent an improvement over the preceding case. More products that are efficient to introduce would be introduced, and the overall rate of use would increase close to Q (Reinhardt, Chapter 2). Since overall expected profits would be set at the breakeven level, there should be less of an incentive for firms to overinvest in them. However, it would be unlikely that things would turn out exactly right. 

---