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Guest Post: A Breakeven Analysis Using Real Data

October 13, 2017

Our Guest Post today comes from Howard Weiss, who is Professor of Operations Management at Temple University. Howard has developed both POM for Windows and Excel OM for our text.

I like to direct my students to real data whenever possible in my Operations Management course. The Philadelphia Inquirer (http://www.philly.com/philly/blogs/inq-phillydeals/grateford-phoenix-prison-400-million-new-20170915.html) has an article about a new prison, Phoenix, that is being built in Pennsylvania to replace the old prison, Graterford. Phoenix is expected to open in July, 2018. The article gives data that makes it very easy to formulate a break-even example for the students.

According to the article, Phoenix cost $400 million to build, will cost $90 per day to house an inmate and will have 4055 beds. Currently at Graterford it costs $123 per day per inmate.

I have asked my students to determine the following:
1. What is the total savings per year assuming the prison operates at 100% capacity?
2. Why is this different from the $48 million dollars reported in the article? Assume the costs given above are correct.
3. How many years will it take until the Phoenix project breaks even based on the $48 million reported in the article?

I expect my students to:
1. compute the savings per inmate per day ($33); the savings per inmate per year ($12,045); the total savings per year? $48,842,475
2. realize that the prison does not operate at full capacity and hopefully to report that the effective capacity is 98%.
3. compute the break-even point in years (8.33 years).

 

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