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Breakeven Analysis

One of the most common questions a converter can ask is, “What is the most economical way to run this job through the plant?” More specifically, “At what point does it pay to switch from a less expensive, slower piece of equipment to a faster but more costly machine?” The answer can be found using breakeven analysis.

To accomplish it, we need to know the hours involved and the variable machine hour rates of the two machines. For this exercise, we are concerned only with costs that accrue directly as a result of running the job, such as labor, electricity, glue, etc. The following example allows us to find the order quantity where, no matter which of two production paths is chosen, each has the same cost.

Case Study
A six-corner carton can glue on either an old right angle makeready, which is quicker but runs slowly or a new straightline makeready, which takes longer but runs faster. At what order quantity will it make sense to switch from the right angle to the straightline?

To solve this problem, use the formula: ($MRb – $MRa) ÷ ($run/carton A – $run/carton B)
The difference in makeready dollars is divided by the difference in run cost per carton.

Sometimes a newer, faster machine requires a longer, more expensive makeready to achieve faster running speeds. If the incremental makeready cost is $100 but the savings when the job is run is 10¢ per unit, the number of units that must be produced to cover the additional makeready is 100 ÷ .10 = 1,000. That means that below 1,000 units, it will be less expensive to use the older, slower machine. Above 1,000 units, it will be more cost efficient to use the new one. 1,000 units, then, is the breakeven quantity.