Free Optimization Study: Essay Example

Final Project

Optimization study is the study that adjusts one or more parameter to achieve the best result. The constraints imposed in the resources like money, technology, time, manpower etc. forces us to perform a optimization study. In this project, our total cost seems to be the constraint factor. So, we consider total cost as a parameter for optimization study.
Total Costs means all the costs incurred in the engaging process. This indicator is the most important in the optimization analysis. Total costs consist of variable costs and fixed costs.
TC= VC +FC
Variable costs (VC) are those, which depends on the quantity of units. The variable cost varies with the total quantity i.e. variable cost per unit remains same, but in total it varies. Fixed costs (FC) do not depend on the quantity and are constant. According to the question given, the costs are segregated as:

Then, we calculate the total variable cost per unit for each vendor. This will be

Let us count Total Costs (TC) for each of the supplier in an annual basis is
Total Cost (TC) = Total Variable Cost per unit * Annual Demand + Total Procurement Cost
TC (1) = 203.95 *1300 + 4550 = $269,685
TC (2) = 230.95 * 1300 + 2600 = $302,835
TC (3) = 273.95 * 1300 + 1690 = $357,825

Break Even Analysis

The breakeven point graph
TBD = 195 $ per unit
Cost to buy = 195* amount of units
Breakeven point is that point at which the cost of making the product equals the cost of buying the product. In this regard, we consider the total cost of making and total cost of buying the product to calculate the breakeven point. To calculate the breakeven point, we have the basic formula as:
Total cost of making = Total cost of buying
i.e. TCM = TCB
For the purpose of this analysis, we first need to calculate the total cost of making and total cost of buying.

The total cost of buying is calculated as

TCB=Cost per unit x Number of units bought
TCB=195 x number of units.. (1)

Then, the total cost of making is calculated as

TCM = Total fixed cost +Variable cost per unit x number of units
TCM = $8500 + $80 x number of units.. (2)

Now, equating equation (1) and (2),

195 x number of units = 8500+ 80 x number of units
Or, 115 x number of units = 8500
Or, Number of units = 74 units

So, in order to achieve the breakeven, the company should produce 74 units of the product.

So, this graph also proves that the breakeven for the company is somewhere around 74 units. So, the company must produce 74 units to be in breakeven.