Slides Calculate Point of Indiff Between Two Diff Scenarios that Share Variable.pptx

8/18/2019 Slides Calculate Point of Indiff Between Two Diff Scenarios that Share Variable.pptx

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Calculate Point Of Indierence

Between Two Dierent Cost Scenarios

Principles of Cost Analysis andManagement

© Dale ! "eiger #


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$%at would you do for a &londi'e Bar(It)s essentially a Cost*Bene+t Analysis,

© Dale ! "eiger -


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Terminal .earning O/0ecti1e

• Action: Calculate Point Of Indierence Between Two Dierent Cost Scenarios T%at S%are A Common2aria/le

• Condition: 3ou are a cost analyst wit% 'nowledge

of t%e operating en1ironment and access to allcourse materials including %andouts andspreads%eet tools

• Standard: $it% at least 456 accuracy7

#! Descri/e t%e concept of indierence point or tradeo -! 89press cost scenarios in e:uation form wit% a

common 1aria/le

;! Identify and enter rele1ant scenario data into macroena/led templates to calculate Points of Indierence

© Dale ! "eiger ;


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$%at is Tradeo(

• .ife is full of Tradeos

• $%at we gi1e up could /e 1isuali

• $%at we recei1e could /e la/eled a=/ene+t>

• T%e transaction occurs w%en t%e /ene+tis e:ual to or greater t%an t%e cost

• Point of e:uili/rium7 t%e point w%erecost is e:ual to /ene+t recei1ed!

$ ill $ or ' f or ? ood

© Dale ! "eiger @


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Tradeo T%eory

• Identi+es t%e point of e:uality/etween two diering coste9pressions wit% a common

un'nown 1aria/le• =e1enue> and =Total Cost> are

cost e9pressions wit% =um/er of

nits> as t%e common 1aria/le7e1enue Price*nit E Fnits

Total Cost G2C*nit E FnitsH ?i9ed Cost

© Dale ! "eiger J


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Tradeo T%eory Gcont)dH

• Brea'e1en Point is t%e point w%ere7

e1enue K Total Cost Pro+t

e1enue K Total Cost 5

e1enue Total Cost

• Setting two cost e9pressions wit% acommon 1aria/le e:ual to one

anot%er will yield t%e /rea'e1en ortradeo point

© Dale ! "eiger L


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$%at is an Indierence Point(

• T%e point of e:uality /etween two coste9pressions wit% a common 1aria/le

• epresents t%e =Decision Point> or

=Indierence Point>• .e1el of common 1aria/le at w%ic% two

alternati1es are e:ual

• A/o1e indierence point one of t%ealternati1es will yield lower cost

• Below indierence point t%e ot%eralternati1e will yield lower cost

© Dale ! "eiger N


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Indierence PointApplications• 81aluating two mac%ines t%at perform t%e

same tas'

• i!e! .aser printer 1s! in'0et

• .ow usage le1el fa1ors t%e in'0et %ig% usagefa1ors t%e laser /ut at some point t%ey aree:ual

• Outsourcing decisions

• $%at le1el of acti1ity would ma'e outsourcingattracti1e(

• $%at le1el would fa1or insourcing(

• At w%at le1el are t%ey e:ual(© Dale ! "eiger 4


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C%ec' on .earning

• $%at is an indierence point ortradeo point(

• $%at is an e9ample of an applicationof indierence points(

© Dale ! "eiger


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Indierence PointApplications• 81aluating two Courses of Action7

• Cell p%one data plan

• Plan A costs !J5 per MB used

• Plan B costs -5 per mont% !5J per MBused

• Plan A is t%e o/1ious c%oice if usage is low

• Plan B is t%e o/1ious c%oice if usage is %ig%

• $%at is t%e Indierence Point(• T%e num/er of MB used a/o1e w%ic% Plan B

costs less /elow w%ic% Plan A costs less(

© Dale ! "eiger #5


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Plan A 1s! Plan B

• $%at is t%e cost e9pression for PlanA(• !J5 E F MB

• $%at is t%e cost e9pression for PlanB(• -5 !5J EF MB

• $%at is t%e common 1aria/le(

• F MB used

© Dale ! "eiger ##


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Plan A 1s! Plan B




• F MB used

© Dale ! "eiger #-


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Plan A 1s! Plan B




• F MB used

© Dale ! "eiger #;


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Plan A 1s! Plan B




• F MB used

© Dale ! "eiger #@


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Sol1ing for IndierencePoint• Set t%e cost e9pressions e:ual to eac%

ot%er7

!J5 E F MB -5 !5J EF MB

!J5 E F MB !5J EF MB -5

!@J E F MB -5

F MB -5*!@J

F MB -5*!@JF MB -5*!@J

F MB @@!@

© Dale ! "eiger #J


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ot%er7



!@J E F MB -5

F MB -5*!@J

F MB -5*!@JF MB -5*!@J

F MB @@!@

© Dale ! "eiger #L


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ot%er7



!@J E F MB -5

F MB -5*!@J

F MB -5*!@JF MB -5*!@J

F MB @@!@

© Dale ! "eiger #N


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ot%er7



!@J E F MB -5

F MB -5*!@J

F MB -5*!@JF MB -5*!@J

F MB @@!@

© Dale ! "eiger #4


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ot%er7



!@J E F MB -5

F MB -5*!@J

F MB -5*!@JF MB -5*!@J

F MB @@!@

© Dale ! "eiger #


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Plan A 1s! Plan B

5 -5 @5 L55

J

#5

#J

-5

-J

;5

;J

Plan A

Plan B

@@!@Axis = Number of MB Used

ost of both plans increases as # MB increases

Cost of Plan A is ero !hen usa"eis ero but increases rapidl$

!ith usa"eCost of Plan B starts at %&' but

increases slo!l$ !ith usa"e

© Dale ! "eiger

-5


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Proof

• Plug t%e solution into t%e originale:uation7

!J5 E F MB -5 !5J E F MB

!J5 E @@!@ MB -5 !5J E @@!@MB

!J5 E @@!@ MB -5 !5J E @@!@MB

--!-5 -5 -!--

--!-5 --!--© Dale ! "eiger -#


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Interpreting t%e esults

• Decision7 $ill you use more or lesst%an @@!@ MB per mont%(• sing less t%an @@!@ MB per mont%

ma'es Plan A t%e /etter deal

• sing more t%an @@!@ MB per mont%ma'es Plan B t%e /etter deal

•$%at ot%er factors mig%t youconsider w%en ma'ing t%e decision(

© Dale ! "eiger --


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Indierence PointsSpreads%eet8nter data to compare two multi1ariate cost scenariosi!e! Cell p%one data plans

Sol1e for Brea'e1en le1el of sage

© Dale ! "eiger -;


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Indierence PointsSpreads%eet8nter dierent :uantities to compare t%e

cost of /ot% options for 1arious le1els of usage

See w%ic% option is more fa1ora/le at a gi1en le1el

© Dale ! "eiger -@


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C%ec' on .earning

• Qow would you +nd t%e indierencepoint /etween two cost options wit% acommon 1aria/le(

• 3ou are ta'ing your c%ildren to t%e


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Indierence Point 89ample

• A si9pac' of soda costs -!J- andcontains N- ounces of soda

• A twoliter /ottle of t%e same sodacontains LN!- ounces of soda

• $%at price for t%e twoliter /ottlegi1es an e:ual 1alue(

• T%e common 1aria/le is cost perounce

© Dale ! "eiger -L


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• $%at is t%e e9pression for cost perounce for t%e si9 pac'(• -!J-*N- o

• $%at is t%e e9pression for cost perounce for t%e twoliter /ottle(• Price*LN!- o

© Dale ! "eiger -N


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© Dale ! "eiger -4


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© Dale ! "eiger -


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Sol1ing for Brea'e1en Price

• Set t%e two cost e9pressions e:ual to oneanot%er7

Cost per o

pac'Price*LN!- o

Price*LN!- o

Price !5;J*o

Price !5;J*o

Price !5;J E LN!-

Price appro9imately -!;J

© Dale ! "eiger ;5


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Cost per o

pac'Price*LN!- o

Price*LN!- o

Price !5;J*o

Price !5;J*o

Price !5;J E LN!-


© Dale ! "eiger ;#


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Cost per o

pac'Price*LN!- o

Price*LN!- o

Price !5;J*o

Price !5;J*o

Price !5;J E LN!-


© Dale ! "eiger ;-


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Cost per o

pac'Price*LN!- o

Price*LN!- o

Price !5;J*o

Price !5;J *o

Price !5;J E LN!-


© Dale ! "eiger ;;


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Cost per o

pac'Price*LN!- o

Price*LN!- o

Price !5;J*o

Price !5;J *o

Price !5;J E LN!-


© Dale ! "eiger ;@


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Si9Pac' 1s! Two.iter

5 # - ; @

G5!5#H

5!55

5!5#

5!5-

5!5;

5!5@

5!5J

5!5L

Lpac' -!J-

-.iter GLN!- o

is = Un(no!n Price of &)*iter

rice of &)liter increases cost per o+ increases

C o s t

P e r O

u n c e

-!;J

Cost of ,)pac( is (no!n soCost per o+ is constant

© Dale ! "eiger

;J


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• If t%e price of t%e twoliter is lesst%an -!;J it is a /etter deal t%ant%e si9pac'

• $%at ot%er factors mig%t youconsider w%en ma'ing your decision(

© Dale ! "eiger ;L


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Indierence PointsSpreads%eet8nter Data for two dierent cost per unit

optionsi!e! cost per ounce of soda

8nter cost of si9pac' and num/erof ounces

8nter num/er ounces in a-literSol1e for /rea'e1en price

© Dale ! "eiger ;N


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C%ec' on .earning

• $%en sol1ing for an indierencepoint w%at two :uestions s%ould youas' yourself +rst(

© Dale ! "eiger ;4


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Tradeos nder ncertainty

• e1iew7 89pected 2alue Pro/a/ility of Outcome# E Dollar 2alue of Outcome#

Pro/a/ility of Outcome- E Dollar 2alue of Outcome-

Pro/a/ility of Outcome; E Dollar 2alue of Outcome;

etc!

• Assumes pro/a/ilities and dollar1alue of outcomes are 'nown or can/e estimated

© Dale ! "eiger ;

% if / /ili i


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$%at if Pro/a/ility isn'nown(• Sol1e for Brea'e1en Pro/a/ility

• .oo' for w%at IS 'nown and w%atrelations%ips e9ist

• Compare two alternati1es7• One %as a 'nown e9pected 1alue

• 89ample7 Only one outcome wit% a'nown dollar 1alue and pro/a/ility of

#556

• T%e ot%er %as two possi/le outcomeswit% un'nown pro/a/ility

© Dale ! "eiger @5

S l i f B '


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Sol1ing for Brea'e1enPro/a/ility• Su/scri/e to automatic online %ard

dri1e /ac'up ser1ice for #55 peryear

O• Do not su/scri/e to t%e /ac'up

ser1ice

•

Pay 5 if your %ard dri1e does notfail

• Pay #555 to reco1er your %arddri1e if it does fail!

© Dale ! "eiger @#

S l i f B '


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Sol1ing for Brea'e1enPro/a/ility• $%at is t%e cost e9pression for t%e

e9pected 1alue of t%e /ac'up ser1ice(

• $%at is t%e outcome or dollar 1alue(

#55

• $%at is t%e pro/a/ility of t%at outcome(

#556

• So t%e cost e9pression is7

#55E#556

© Dale ! "eiger @-

S l i f B '


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Sol1ing for Brea'e1enPro/a/ility• $%at is t%e cost e9pression for t%e

online /ac'up ser1ice(

• $%at is t%e outcome or dollar 1alue(

#55

• $%at is t%e pro/a/ility of t%at outcome(

#556


#55E#556

© Dale ! "eiger @;

S l i f B '


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Sol1ing for Brea'e1enPro/a/ility• $%at is t%e cost e9pression for not su/scri/ing

to t%e online /ac'up ser1ice(

• $%at are t%e outcomes and dollar 1alues(• Qard dri1e failure #555

• o %ard dri1e failure 5

• Qow would you e9press t%e un'nown pro/a/ilityof eac% outcome(• Pro/a/ility6 of %ard dri1e failure P

• Pro/a/ility6 of no %ard dri1e failure #556 P


#555EP 5EG#556 PH

© Dale ! "eiger @@

S l i f B '


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Sol1ing for Brea'e1enPro/a/ility• $%at is t%e cost e9pression for not su/scri/ing

to t%e online /ac'up ser1ice(

• $%at are t%e outcomes and dollar 1alues(• Qard dri1e failure #555

• o %ard dri1e failure 5

• Qow would you e9press t%e un'nown pro/a/ilityof eac% outcome(• Pro/a/ility6 of %ard dri1e failure P

• Pro/a/ility6 of no %ard dri1e failure #556 P


#555EP 5EG#556 PH

© Dale ! "eiger @J

S l i f B '


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Sol1ing for Brea'e1enPro/a/ility• Set t%e two e9pressions e:ual to one anot%er7

82 of not su/scri/ing 82 of su/scri/ing

#555EP 5EG#556 PH #55E#556

#555EP 5EG#556 PH #55E#556#555EP #55E#556

#555EP #55

P #55*#555

P #55*#555P !# or #56

© Dale ! "eiger @L


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"rap%ic Solution

5 5!5J 5!# 5!#J5

-5

@5

L5

45

#55

#-5

#@5

#L5

82 of Su/scription

82 of no su/scription

xis = Probabilit$ of hard dri-e failure

robabilit$ increases expected -alue .cost/ increases

Cost of subscription is (no!n so0xpected 1alue is constant

© Dale ! "eiger@N


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• If t%e pro/a/ility of %ard dri1e failureis greater t%an #56 t%en t%e /ac'upser1ice is a good deal

• If t%e pro/a/ility of %ard dri1e failureis less t%an #56 t%en t%e /ac'upser1ice may /e o1erpriced

• $%at ot%er factors mig%t youconsider in t%is case(

© Dale ! "eiger @4

I di P i t


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Indierence PointsSpreads%eet

ol1e for /rea'e1en Pro/a/ility

De+ne t%e two options you are comparing

© Dale ! "eiger @

I di P i t


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Indierence PointsSpreads%eet

8nter 'nown data for /ot% optionsSol1e for un'nown pro/a/ility

See %ow e9pected 1alue c%angesas pro/a/ility c%anges

© Dale ! "eiger J5


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$%at If(

• $%at if t%e cost of reco1ering t%e%ard dri1e is -555( $%at is t%e/rea'e1en pro/a/ility(

• $%at if t%e cost of t%e /ac'upser1ice is J5( J55(

© Dale ! "eiger J#


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C%ec' on .earning

• $%at is t%e e:uation for e9pected1alue(

• $%ic% 1alue is represented /y a

%ori


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Practical 89ercises

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Slides Calculate Point of Indiff Between Two Diff Scenarios that Share Variable.pptx