Advantages Of Warehouse Automation Accounting Essay

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The objective of this project is to create innovative technologies in the field of automation and material handling for warehouse application. It aims to develop a suitable material handling system according to the requirement of the company. This will offer benefit in increasing the overall profit by doing the process quickly and efficiently, at the same time it reduces the manpower, labor cost and human stress. There are several types of material handling systems which can be operated automatically such as conveyors, and systems for packing, labelling, automatic box opening, check weight, robotic, picking etc. These systems are really useful for warehouses and mainly for packing and parcel services. It also includes the safety and ergonomics in material handling equipment's along with risk assessments involved in it.

Since warehouses and distribution centres already use material handling equipment, many with a manual system, the proper time to evaluate the equipment effectiveness and decide on any changes is during the warehouse automation process design. Careful analysis is required in defining a material handling solution that has the flexibility required to manage both the current and projected product flow and volumes. Selecting the exact level of warehouse material handling system (WMS) leads to greater operation efficiency, flexibility, and return on investment than attempting to design a system or process around existing material handling equipment. There may be several alternatives that will optimize the warehouse and distribution operations. It is important to base the material handling equipment evaluation and selection on the automation project's business objectives and process and requirements definitions in order to create a flexible, integrated solution and increase in profit. These process definitions also describe the interfaces required to ensure proper communication between the material handling equipment and the warehouse management system.

INTRODUCTION (www.wbdg.org/design/warehouse.php)

Warehouse is the place which is built up of proper environment for the purpose of storing goods and to distribute them to various locations when required, it is the place which gives protection for materials from several elements. It plays a major role in supply chain making up between 2 and 5 percent of the cost of sales of a corporation. It should be designed to provide space for loads of materials that has to be stored, space for material handling equipment's, the loading and unloading operations and associated trucking, and the needs of the operational workforces. The warehouse should be planned in order to best accommodate business service requirements and materials that has to be stored and handled safely. (8)

Types of Warehouses

General warehouses - it is a type were space is provided for storing bulk, racking, bin storage, receiving and shipping space, labeling and packing, equipment space and general space.

Refrigerated warehouses - it provides space to preserve the quality of unpreserved materials, and goods which requires refrigeration. It also includes space for freezing and chilling, processing services and mechanical areas.

Controlled humidity warehouses - it is very similar to general type warehouses expect they are build up with vapor barriers and contain humidity control devices to control humidity at anticipated levels.

This project mainly concentrates on general type warehouse, particularly for parcel/ packing and distributing industry were more optimisation and analysis is required in order to minimise the cost of production, reduce the manpower/labour cost and to increase the efficiency and overall profit. For achieving this automation and material handling has to be considered as an important factor in each warehouse. Automating a warehouse and improving the material handling equipment's within a distribution centre is a costly journey and requires knowledge and understanding about automation and expertise to find solution of human society's significant challenges. In order to overcome the complicity of significant challenges, we should study and find a way to address them with the skills of automation which is significant too. To be aware it will mostly affects the parts of the company's business. A careful preparation and sound strategy are the tools to avoid failure and to overcome the obstacles throughout the project. Successful implementation of latest technologies to warehouse and distribution centres empowers a company to increase a competitive edge by improved ability in the right quantity, to deliver the right products at the right time. It is necessary to analyse present operations within a warehouse and distribution centres if the customer demands increases and should realise that is the right time to implement new technologies. Utilizing the distribution automation in companies improve the productivity, reduce space requirements, order accuracy, increase volume capacity, obtain total inventory control and accountability, and increase customer service and market share.

It is tremendously important to make a proper approach in developing a distribution or warehouse automation plan in order to increase a company's return on major investment required. The warehouses operating with more manual operations and batch system are finding it extremely difficult to meet the changing customer demands and difficult to survive in today's market place with depends on accurate distribution. Warehouse automation integrates warehouse management system, wireless terminals, bar code technology, scanners, storage systems, material handling equipment, operating procedure and people in to a single working unit that must effectively interface within the distribution business cycle with all other business areas. The success of this project and reward include increased profit and productivity, increases customer satisfaction, reduction of labour cost, reducing manpower and improved inventory accuracy. (springler)

AUTOMATION (2) (springler)

It is the science of integration which is not only used for reducing the manpower in a manufacturing process which is done by machines; it mainly implemented to increase the productivity at minimum cost which ensures good quality and in turn reduces the time. Automation equipment's and its related services contributing a lot in almost all the industries especially packing and parcel industry which constitutes a large and rapid growing market. Today automation has expanded to all almost every industry and even in areas of day life. In simple terms automation can be considered as the combination of mechanical, electronic devices, supporting technologies, computer based system coupled with advanced information and communication technology. It is a dynamic technology which is responsible for continuous evaluation of process by using machines to take over the work which is previously done by using man power. Automation is a technological process of development which proceeds in to predictable future. This includes the following technologies

Automatic machine tools to process parts

Automatic material handling and storage systems

Industrial robots

Automatic assembly machines

Feedback control and computer process control

Automatic inspection system for quality control

Computer systems for data collection, planning, and decision making supporting manufacturing activities.

Automation is the foremost science of integration apart from research in technologies like actuators, sensors, user interface and process control, which helps to design and implement the operation of complex systems which has to fulfil great standards of functionality, cost effectiveness, safety and usability. So one has to be expert and need to have necessary knowledge and skills to create and operate large scale system.

Reason for automation

Most of the industries and warehouse undertake automation project and make their process completely automated for various good reasons, some of the important reasons are as follows:

Increasing productivity

High labor cost

Shortages of labor

Safety

High raw material cost

Trend of labor towards service sector

Low manufacturing lead time

Increased cost of not automating

Reduction of in process inventory

Improved quality of product

All these factors combines together to make automation an alternative way instead of using manual method of manufacturing and make it feasible.

MATERIAL HANDLING

Now a days the need for material handling system increases along with the development of factory system. It is the process by which the materials can be moved from one place to another place where it has to be moved or stored, it may include the movement of packages, bulk materials, and individual goods of different shapes and size with the help of machines or man power. The main objective of the material handling is to move the product between the plant locations with minimum operating cost, just in time and it has to be delivered to exact address with planned deliveries. At the same time it has to ensure whether right product is send to exact location with possible reduction in cost, handling maximum volume, with no damage to material, building, and work force. The cost for material handling is difficult to estimate because it depends on the work plant, but mostly it ranges from 20% to 30% of the product cost. In recent days many advancement in material handling has been done and new equipment's are discovered and manufactured in large amount which all contributes to the profit of an organisation. In warehouse the competitor may have the same technology and material handling equipment which you have, so you have to update by improving your material handling system to stay competitive.

In this competitive world, warehouse should be equipped with more cost effective and quick supply chain system to stay in the market. Companies which are investing in material handling system not only reducing the labour cost and operating cost, but at the same time increasing the warehouse management system, production integrity, transparency, and increase quantity. The material handling industry of America (MHIA) estimates that, the manufacturing of new material handling equipment machines (MHEM) grew 10% in 2006 compared to 2005. Previously the labour cost was considered as an important element in estimating the return on investment (ROI) of an automated material handling system (AMHS) and it was relatively small part of the manufacture or warehouse facility. But nowadays, it's becoming large because of the impact of the system throughout supply chain and it is more complicated. The radiofrequency identification system (RFID) enhances the customer satisfaction, provides convenience in data collection as well as reduces the order picking time and errors in warehouse shipping. AMHSs are not selected as alternatives for economic analysis, but are rather major components in production and warehouse facility. The major aspect is the size of the systems and its operations are getting complex. Multiple AMHSs having RFID system, automated guided vehicles (AGVs), and automated storage and retrieval (AS/RS) system installed as a connected system in production and warehouse. The optimisation of the design and operation of system has become interest to both AMHS vendor company and their customer as its complexity has increased.

REASON FOR THE PROJECT

The reason behind this project is due to my own experience in a warehouse. In order to reduce the manpower and labors used in warehouse, research has to done in the field of automation and material handling according to the warehouse nature and workplace. The main thing which insisted me to do this is because, when I was working in a warehouse moving masses of parcels and packages in a cage all over the warehouse space. By that time I felt how much work force is utilized that may cause lot of health and safety problems. So I thought lot of automation and material handling is required in the warehouse to improve the safety and ergonomics of the workforce in turn to improve the efficiency and profit of the company. At the same time labor cost can be reduced to high level which can be used to implement automated system which is profitable and accruable. This project is the solution for all the warehouses which are spending more money in workforce and having no awareness about the benefits of automation and material handling. The technological development in the field of automation and handling of materials are now making the companies to be top among the competitors by saving time, reducing human error, increased profit, continuous flow of materials and customer satisfaction. At the end the result of this project is to find the possible ways to eliminate the manpower to maximum extend and to increase the profit by reducing the labor cost by the calculating the return of investment.

PERSONNEL EXPERIENCE

The main reason for which i wanted to implement the latest technology and material handling equipment in packing/parcel industry is my own experience when i worked in "city link" warehouse. It is a company providing excellent courier service across the UK, It has many branches of warehouse which mainly handling of parcels, documents, pallets and cartons which has to be delivered to different places within the country. The process which occurs inside the warehouse is trucks will be coming with full of parcels and goods which has to be send to exact destination from which it is delivered to customers in time. The parcels are unloaded in one area of the plant and it is filled inside the cages according to their destination point which are then moved by the workers manually to its loading point. I was working as a labor in one of its warehouse, inside the work place i have to move the cages and pallets manually throughout the work area without any rest. This creates more stress for the workers mentally and physically. Even i have faced many problems with my health when i continued working there for more than two months that made me to quit the job later.

I am not only the one who got affected with that workplace, i could find many people who are suffering difficult in working there, but still people do it for money and those who are really not cared of their health. This initiated me to find a possible ways to improve the workplace by utilizing proper material handling solutions.

SCOPE OF THE PROJECT

The scope of the project in material handling and automation is very vast in the future. Every company will be successful with their profit and turnover if they know the real advantage of the automation and its importance. This plays a very important role in reduction of manpower and need of humans in workplace place. This mainly aims to avoid the labor cost and improvers the safety and quality of work environment. It helps in economic development of an organisation and is important in world economy and in day to day life. To create complex systems engineers combine automated devices with mathematical and organizational tools for a rapidly expanding range of applications and human activities. I creates an awareness of material handling problems and reduces the damage due to material handling This project involves latest technologies in the field of automation and material handling equipment's like automated guided vehicles (AGVs), automatic storage and retrieval system (AS/RS), conveyors, barcode sensors, industrial robots, PLCs, etc. These make an effective warehouse management system with no mental and physical stress for the workers and with better work environment. So this field creates a bright future for all the distribution and warehouse centres to stay competitive and to survive successfully with good customer satisfaction.

FUTURE TREND

Many countries are now planning to create centrally automated warehouses. They started realising that i would be better to have centralized efficient inventories than various small distribution centres, which are difficult to maintain and track. The other important area in warehouse is order picking which are expected to obtain momentum in near future. Automated order picking system will reduce the human labour and make it flexible, modular and sensitive. Accordingly, conveyor picking system will have great significant role in warehousing. Barcodes, RFID, remote sensor, AS/RS and AGVs will be among the significant development in warehouse automation. In this growing competition industries should realize the importance of warehouse automation to survive in growing competition for efficient warehousing.

ADVANTAGES OF WAREHOUSE AUTOMATION

It reduces the cost involved in manpower and material replacement.

It increases the efficiency accuracy of each task.

Increased productivity and economic development.

Control of products is improved.

Reduction of excessive handling of materials.

It improves productive capacity of existing floor space.

The response time to customer demand is increases

DISADVANTAGES

Initial investment cost will be more

Periodic maintenance is required and cost involved for it

Steep cost of downtime, warehouse will be halt till it get innovated

Low tolerance to inconsistencies due to mechanisation

Return in investment takes couple of years (pdf)

www.iwarelogic.com

SAFETY AND ERGONOMICS

All the industries have to give more importance for safety and ergonomics as it involves the life of human beings and efficiency of the company. The principle of ergonomics is to design the workplace which best suits for utilizing the human capabilities. Designing for safety and health is envisioned to be both a practical guide and instructional tool with application to all industries, which are involving the handling of materials, and to those individuals who have responsibility on occupational health and safety. This topic covers the major factors of health and safety related to hazards faced by the work place and labors who has to carry more weights, lift, move long distance, and handle with various size and variety of materials. Material handling has more impacts on work places in some ways, while handling materials in production line, the movement of heavy equipment, or during the storage of products in warehouse.

The handling of all varieties of materials may manifest in the individual effort by the workers to lift or move materials using large industrial cranes and hoists. There are safety and hazard concerns which are needed to be addressed by all the industrial sectors, especially workplaces which are involving the moving of materials while loading and unloading in time schedule, no matter which procedure is followed at the end. But improper storage of materials and handling may result in costly injuries.

The efficient material handling and storage is vital for the function of industry which provide continuous flow of raw materials, products, parts throughout the workplace and ensures the materials and products are available when needed in right time. The proper and safe handling of materials must be carried out in compliance with existing Occupational Safety and Health Administration (OSHA) regulatory guidelines for the system used the procedures or methods followed, and the appropriate storage of each type of material. (4)

The most common occurrence of hazards is due to improper handling of materials ranging from back injuries to events as catastrophic as the collapse of the crane, which may lead to loss of lives and extensive property damage. Back injuries occurs with most of the workers when they are working especially in warehouse, an average back injury may cost around 9,000 dollars and at the same time one fatality cost approximately 1,000,000 dollars, these types of monetary losses or resource loss cannot be absorbed by most companies. These resources are in the form of production loss, human suffering and value of dollars which creates quick attention of the investors and owners and workers as well.

Beyond the necessities of OSHA these rising cost have activated attention to occupational safety and health. So it is safe to say that health and material handling safety in the workplace is every individuals bob and can have a determined effect on the bottom line. Thus, it will result in payoff when attention is paid to safety handling of materials. This information will make the readers to realize its importance and will help to adapt and implement safety material handling policies and health initiatives in their department, workplace, or job. (4)

CALCULATION FOR RECOMENDED WEIGHT LIMIT (4)

Every worker should take some time to evaluate the lift, ensure no hazards around them and to assure that they can make the lift safe before performing a new lifting operation. NIOSH provides the exact guidelines and calculations which are logical and are backed by state of the art science and research. Actually this document is for symmetrical lifting but most of the lifting is asymmetrical in nature in the workplace. The lifting formula which is revised has incorporated the asymmetrical component to address the previous deficiency.

The following is the summary of the formula and intent in the applications manual for the revised NIOSH lifting equation. This equation provides a set of evaluation parameters that include (i) intermediate task related multipliers to define the extent of stress that are physically associated with individual task factors; (ii) the NIOSH lifting index (LI), which provides an estimate of the overall physical stress associated with a manual lifting task; (iii) NIOSH'S recommended weight limit (RWL) which defines the value of weight load for specific tasks, that are responsibly safe for healthy workers.

The RWL is defined as follows

RW = LC Ã- HM Ã- VM Ã- DM Ã- AM Ã- CM Ã- FM

The load constant (LC) is equal to 51 pounds and the remainder of equation contains tasks of specific multipliers which tend to reduce the recommended weight limit (RWL) according to the specific task factor to which each multiplier applies which is mentioned in (table). The magnitude of each multiplier will range between zero and one which depends on the value of the task factor to which the multiplier applies. The multipliers are defined in table

In order to use the equation the analysis must make the following measurements:

L = Weight of load being lifted (kg or lbs).

V = Vertical location of hands from the floor. Measured at the origin and destination of the lift (cm or in).

H = Horizontal hands location of the hands from the midpoint between the ankles. Measured at the origin and destination of lift (cm or in).

A = angle of asymmetry which is defined as the angular displacement of the load from the sagittal plane when lifts are made to the side of the body in (degrees).

F = average frequency rate of lifting measured in lifts/min.

Duration is defined to be 1hour; 2 hours; or 8 hours by assuming appropriate recovery allowances as shown in table.

The lifting index (LI) provides a relative level of physical stress estimation associated with a particular manual lifting task. The estimation of physical stress level is calculated by the ratio of weight of the load lifted and the recommended weight limit. The formula for LI is as follows

LI = Load Weight (L) / Recommended Weight Limit (RWL)

A detailed explanation of the use of revised NIOSH lifting equation containing all the terms and procedures are available in the Applications Manual for the Revised NIOSH Lifting Equation (Waters, 1994)

COST ANALYSIS

The important and major fact to be considered while implementing new technologies is cost analysis. When a warehouse has to be automated it involves more material handling equipment's and high investment cost. The main reason and problem for all the companies to make it automated will be the initial cost involved in that, but at the same time if we consider the labour cost, return in investment and profit it is going to be beneficial within short time period which can be calculated by break-even point. So it is not going to be a big deal for companies having initial investment ready.

METHODS OF EVALUATING INVESTMENT ALTERNATIVES (2)

There are several methods of comparing and evaluating investment proposals, including the following:

Payback period method

Present worth (PW) method

Uniform annual cost (UAC) method

Rate of return method

In the discussion of these methods in this session we can adopt the conventional that positive cash flows represent money coming in (revenues and/or profits) and negative cash flows represents money expected (costs).

PAYBACK METHOD

This method uses a simple concept that the net revenues derived from an investment should pay back the investment in a particular period of time called payback period. Let us refer to the net revenue in a given year as the net annual cash flow (NACF). If the revenues exceed costs for the year, the NACF is positive. The NACF is negative if the costs exceed revenues.

Assuming for the moment that the net annual cash flows are positive and equal from one year to the next, the payback period can be defined as the follows

n = IC / NACF

Were IC is the initial cost of investment of project and n is the payback period in years. For example if the new production machine cost is £85,000 installed and is expected to generate revenues of 55,000 pounds per year for 7 years. It will cost £30,000 per year to operate the machine, at the end of 7 years the machine will be scrapped at zero salvage value, the payback period for this investment i calculated by follows

NACF = 55,000 - 30,000 = £25,000 per year of 7 years

IC = 85,000 pounds so the payback period will be£

n = 85,000 / 25,000 = 3.4 years

In most real time situations the net annual cash flows will not be equal after a year so this concept is not applicable for that we can make use of simulation procedure to determine how many years are required for the initial cost to be recovered by accumulating net annual cash flow. The procedure is summarized by the following

n

O = - (IC) + ∑ (NACFj)

j = 1

Where NACFj represents the net annual cash flow for year j. The value of n is determined so that the sum of the NACF values equals the IC values.

PRESENT WORTH METHOD

This method uses the equivalent present value of all current and future cash flow to evaluate the investment proposal. The future cash flows are converted into their present worth by using the appropriate interest factors. Therefore some interest rate must be used in the factors. This rate of interest is decided in advance and represents the rate of return criteria that a company is using to evaluate its investment opportunities. If the aggregate present worth of the project is positive, the return from the project exceeds the rate of return criteria. The project does not meet the rate of return criteria then the present worth of project is negative. The data from the previous example can be used and assuming that company considering the investment uses a rate of return criteria of 20% then the present worth of the proposal will be

PW = -85,000 + 55,000 (P/A, 20%, 7) - 30,000 (P/A, 20%, 7)

= -85,000 + 25,000 (3.6046)

= + 5,115 dollars

Since the present worth is positive we consider that the return from the investment exceeds the rate of return criteria of 20% and therefore it is a meritorious project.

UNIFORM ANNUAL COST METHOD

The UAC method converts all the current and future cash flows to their equivalent uniform annual cost using the given rate of return. As with the present worth method a positive aggregate uniform annual cost means that the project exceeds the criteria. In this method all the cash flows not already expressed as UAC values are converted to their uniform annual cost equivalents.

UAC = 85,000 (A/P, 20%, 7) + 55,000 - 30,000

= -85,000 (0.2774) + 25,000

= + 1421 dollars

Since the UAC value is positive the actual rate of return is greater than 20%, just as we obtained using present worth method.

RATE -OF -RETURN METHOD

This method is also called as return-on-investment method (ROI) method. This goes slightly beyond the PW and UAC methods by calculating the rate of return which is provided by the investment. If the calculated rate is greater than the rate of return criteria then the investment is acceptable.

In order to determine the return of investment an equation must be set up with the rate of return as unknown. By using either PW or UAC method the equation can be established. Then the value of the interest rate 'i' which drives the aggregate UAC or PW to zero is determined. A uniform annual cost equation will be set up to illustrate determination of return.

UAC = -85,000 (A/P, i, 7) + 55,000 - 30,000

(A/P, i, 7) = 25,000/85,000

= 0.2941

Finding the A/P values in the interest tables at n= 7 years for different values of i, we find that (A/P, 20%, 7) = 0.2774 and (A/P, 25%, 7) = 0.3163. By interpolation method the value of i = 22.15% corresponding to our (A/P, i, 7) = 0.2941 is computed.

COST IN PRODUCTION

Manufacturing cost is divided in to major two categories, fixed cost and variable cost. The difference between the two is based on whether the expense varies in relation to the level of output.

Fixed Cost:

A fixed cost is one which is always constant for any production output level. Fixed cost mainly includes the cost of factory building, property taxes, insurance and cost of production equipment. All these fixed cost can be expressed as annual cost. The capital investments for items like factory building and production equipment can be converted in to their equivalent uniform annual cost by preceding section methods.

Variable Cost:

Variable cost is one that increases with the increase in the level of production. This includes direct labour cost, raw material cost, and electrical power required to operate the machines. The main concept of variable cost is that is directly proportional to the output level. When variable costs and fixed costs are combined it gives the total manufacturing cost as a function of output. A general relationship is shown in (figure)

Overhead Cost:

Apart from fixed cost and variable cost financially specialists of a manufacturing company usually prefer to think in terms of material cost, labor cost, and overhead cost. Overhead costs include all other costs associated within a manufacturing firm.

It can be divided in to two categories factory overhead and corporative overhead. Factory overhead included the cost of operating the factory apart from material and lobor cost which includes expenses spent on plant supervision, maintenance crew, insurance, heat, material handling crew, custodial services, shipping and receiving etc. The corporate overhead cost is the cost of running a company other than its manufacturing or process activities which includes expenses on corporate executives, sales personnel, accounting department, finance department, research and development, design and engineering etc. For example in a warehouse the total operating cost of a plant is £900,000/year and the direct labour cost is £400,000 which means £500,000 is the indirect or overhead cost. Then the factory overhead rate for this plant is

Factory overhead rate = £500,000 / £400,000 = 1.25

COST OF AUTOMATED EQUPEMENT USAGE

The problem with overhead rates as we determined is mainly based on direct labour cost alone. A warehouse owner who runs the firm manually and with old material handling equipment's will have same overhead rate as who runs the firm with modern automated equipment representing £ 250,000 investment. Obviously the time on the automated machine should be valued at a higher rate. To overcome this problem it is appropriate to divide the production cost in to two components direct labour and machine cost which will be applicable for factory overhead. The direct labor cost is the wages directly paid to the workers in the plant and the capital cost involved in implementing automated equipment's over the life of asset at the appropriate rate of return used by the firm is called the machine cost. This provides the annual cost as an hourly rate by dividing the annual cost by number of hours used per year. This includes the power required for the machine, maintenance and repair cost, floor space and so on. In our case we consider the following data as assumption and the hourly rate of a given work place can be determined as below

Direct labour cost = £7/hour

Applicable labor factory overhead rate = 60%

Capital investment in machine = £100,000

Service life = 8 years

Rate of return used = 10%

Applicable machine factory overhead rate = 50%

If the equipment is operated one 8-hour shift per day, 250 days per year, then the appropriate hourly cost for this worker-equipment system is calculated by

The labor cost per hour is £7.00 (1+ 60%) = £11.20 / hour

The equipment cost must be first annualized

UAC = 100,000 (A/P, 10%, 8)

= 100,000 (0.18744)

= £18,744 / year

The number of hours per year is 8 Ã- 250 = 2000 hours/year. Dividing the £18,744 by 2000 gives £9.37/h. Applying the 50% overhead rate the machine cost per hour is £9.37(1 + 50%) = £14.06/h. So the total work centre rate is calculated by

Total work centre rate = £11.20 + £14.06

= £25.26/hour

BREAK EVEN ANALYSIS

Break even analysis is a method of monitoring the effect of changes in production output on cost, profit and revenues. This is the main tool for this project which helps in analysing the period of profit and the return in investment. The main justification of this project comes with the identification of the payback time for the capital investment produced by the warehouse owner in implementing new technologies and material handling equipment's. This method is mostly conceptualized in a form of break-even chart. Manufacturing cost is divided in to fixed and variable cost in order to construct a break even chart.

The sum of these two costs is plotted as a function of production output. In order to plot the total cost, the variable cost/unit change in output has to be determined. Revenues can also be plotted on the chart as a function of production of production output. Break even analysis helps in identifying two main purposes they are:

Profit Analysis:

While considering the profit analysis, break even chart shows the effect of changes in output on costs and revenues. This gives a clear picture of how profit and losses will vary for different levels of output. The break-even point is the level of output at which total costs equal revenues and the profit is zero. Example of break-even chat used in profit analysis is shown in (figure) with the following assumptions. If the manually operated production machine costs £66,063, it will have a service life of 7 years with an anticipated salvage value of £5000 at the end of its life. The equipment will be used to produce one type of process at a rate of 20units/h. The annual cost to maintain the machine is £2000. A machine overhead rate of 15% is applicable to capital cost and maintenance. Workers used to run the equipment cost £10.00/h and the applicable overhead rate is 30%. If the value added is £1.00/unit and the rate of return criteria is 20% then we can calculate the profit break-even point by the following calculation

Let Q be the annual level. Variable cost is labor cost including applicable overhead divided by production rate.

= £10.00/h (1 + 30%) / 20 units/h

= £0.65/units

The variable cost as a function of Q is 0.65Q

The annual fixed cost is figured on the automatic machine investment plus the maintenance. First by ignoring overhead we get

UAC = 66,063 (A/P, 20%, 7) + 2000 - 5000(A/F, 20%, 7)

= £19,939

Now adding 15% overhead the fixed cost = £22,930.

The sum of fixed and variable cost provides the total cost equation as a function of Q

Total cost = £22,930 + 0.65Q

Revenues as a function of Q are the product of value added per unit multiplied by Q. Revenues = £1.00Q. This is plotted in the (figure). The break-even point occurs where the revenue line intersects the total cost line. In order to calculate the break-even point, the following equation can be used

Profit = 1.00Q - 22,930 - 0.65Q = 0

1.00Q = 22,930 + 0.65Q

0.35Q = 22,930

Q = 65,514 units/year

At the process rate of 20 units/h this would require 65,514/20 = 3276 hour/year.

Production Method Cost Comparison:

This is the method in which the break-even chart shows the effect of changes in the level of output on the cost of two different methods of production. The break-even point from the chart gives shows the output level at which the costs for the two production methods are equal. When two are more methods like manual and automated methods of production are plotted on the same chart that shows the break-even point for each pair of production methods. (Figure) shows the break-even chart used for the production method cost comparison.

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