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ChaPter 3 • ProjeCt management 67

Annie’s Equipment Figure 3.10
70,000 Break-even analysis for a
Current proposed inventory system.
System
60,000

50,000
Break-Even
Point
40,000
Cost
($) Proposed
System
30,000
20,000

10,000

0
0 200 400 600 800 1,000 1,200
Units Sold
Cost of proposed Cost of current
system system

that were just discussed. Figure 3.10 is an example of a break-even analysis on a small store that
maintains inventory using a manual system. As volume rises, the costs of the manual system
rise at an increasing rate. A new computer system would cost a substantial sum up front, but the
incremental costs for higher volume would be rather small. The graph shows that the computer
system would be cost-effective if the business sold about 600 units per week.
Break-even analysis is useful when a business is growing and volume is a key variable in
costs. One disadvantage of break-even analysis is that benefits are assumed to remain the same,
regardless of which system is in place. From our study of tangible and intangible benefits, we
know that this is clearly not the case.
Break-even analysis can also determine how long it will take for the benefits of the system
to pay back the costs of developing it. Figure 3.11 illustrates a system with a payback period of
three and a half years.

70,000
Cumulative benefits from
proposed system
60,000
Benefits
Cumulative costs of
50,000 proposed system
Payback
40,000 Period Cumulative Cumulative
Cost Costs Year Cost Costs Benefits Benefits
($) ($) ($) ($) ($)
30,000
0 30,000 30,000 0 0
20,000 1 1,000 31,000 12,000 12,000
2 2,000 33,000 12,000 24,000
3 2,000 35,000 8,000 32,000
10,000
4 3,000 38,000 8,000 40,000
5 4,000 42,000 10,000 50,000
0 6 4,000 46,000 15,000 65,000
0 1 2 3 4 5 6
Year
Figure 3.11
Break-even analysis showing a payback period of three and a half years.