Adapting traditional breakeven analysis to modern production economics: Simultaneously modeling economies of scale and scope

Abstract

Although sophisticated models exists for the justification of advanced manufacturing technologies, practitioners often rely on simple tools, such as cost volume breakeven analysis (CVBA), to make initial comparisons between equipment alternatives. In the case of expensive automation technologies this initial comparisons may be followed by further attempts, using more sophisticated models, to define the costs and benefits of the alternatives remaining after CVBA. Ultimately, a leap of faith based upon some “intangible” benefits may underlie the actual adoption of new manufacturing technology (NMT). Finally, the implementation process determines the actual costs incurred and benefits derived from NMT. In this paper, we provide a historical perspective and show that CVBA is inadequate in the context of the process of justification for modern automation technologies. We also introduce an alternative to CVBA, cost volume flexibility breakeven analysis (CVFBA) and use examples to demonstrate its usefulness, particularly in the context of modern manufacturing technologies. CVFBA provides an approach which allows both economies of scale and economies of scope to be considered in initial comparisons between equipment alternatives. It may be applied at various levels of the managerial decision hierarchy.