10: Breakeven Analysis

Question 1

Reminder on what the contribution calculation is?

Answer 1

Variable costs (total or per unit)

Question 2

What is the breakeven point and what’s the calculation in units?

Answer 2

It’s when the profit is 0!

BEP in units = total fixed costs / contribution per unit

Question 3

What are the three steps to doing a BEP question? In units

Answer 3

1. Determine the contribution per unit
2. Add up the fixed costs
3. Put in the equation

Total fixed costs
————————
Contribution per unit

Question 4

What is the breakeven point calculation in revenue?

Answer 4

Total fixed costs
————————
Contribution ratio

Question 5

What is the contribution ratio?

Answer 5

Contribution
——————
Sales

Can be done in total
Or per unit
😊

Question 6

What can you do with the contribution ratio if given it?

Answer 6

Can use it like a gross profit margin

To figure out the selling profit and CoS!

Question 7

What is the margin of safety?

Answer 7

The level of sales between:

the budgeted sales and the breakeven point

So the amount sales can fall while you still make a profit!

Question 8

What are the two MoS calculations?

Answer 8

Units =
Budgeted output - breakeven output

% =
Budgeted output - breakeven output
—————————————————
Budgeted output
X 100

Question 9

Steps to doing a BEP question with revenue?

Answer 9

Find the contribution ratio!

Then put into the calc 😊

Question 10

Steps to doing a MoS question?

Answer 10

1. Determine the breakeven point
2. Determine the budgeted point (if you need to)
3. Put in formula

Question 11

What are profit targets?

Answer 11

How many units or revenue they need to do in order to achieve a certain level of profits

Question 12

What is the calculations for profit targets?

Answer 12

The same as BEP, but with TP added on the numerator!

Units (volume) =
Total fixed costs + TP
——————————
Contribution PU

Revenue =
Total fixed costs + TP
——————————
Contribution Ratio

Question 13

What are the assumption and limitations of BEP?

Answer 13

Constant sales price

Constant variable costs per unit

Constant fixed costs

Production = sales

Costs are easily classified as fixed or variable

Applies to a single product or constant mix

Charts time consuming

Ignore uncertainty of estimates

Question 14

The difference between a traditional breakeven chart and contribution breakeven chart?

Answer 14

Traditional shows the fixed cost line whereas the contribution breakeven chart shows the variable cost line

Contribution chart shows the contribution, between the revenue and variable cost

On both
- breakeven point is where the sales line cuts the cost line

Question 15

Reminder, what is a limiting factor? And what can we do with it?

Answer 15

A factor (or scarce resource) which prevents a company from achieving the level of activity that it would like to achieve

Can calculate the optimal production plan!

Question 16

What are the three steps for identifying the limiting factor?

Answer 16

1. Find the total amount that is needed to hit target
2. Add this up, if separate products!
3. Is that within the limits of the resources available to us?

Is yes, it’s not the limiting factor!

Question 17

What is limiting factor analysis?

Answer 17

Maximising the contribution per unit of the limiting factor

Question 18

What are the four steps for creating an optimal production plan?

Answer 18

1. Calculate the CPU for each product
2. Calculate the CPU of the limiting factor
   (contribution / amount of resource per unit)
3. Rank these by highest contribution
4. Create the plan: share out resource by rank

Question 19

What else can be a limiting factor?

Answer 19

Anything else where the optimal production plan is restricted

Can be anything that’s not a scarce resource

Just make sure you fulfil the restriction first

Question 20

What is a make or buy decision?

Answer 20

Happens when demand exceeds production capacity

Firm needs to decide whether to buy in resources from external suppliers

Also which products to manufacture itself and which to subcontract out

Questioned in the presence of a limiting factor

Question 21

What are the four steps to a make or buy decision?

Answer 21

1. Calculate the saving per unit of internal production
   (external purchase price - variable costs of making)
2. Calculate the SPU of the limiting factor
   (saving / amount of resource per unit)
3. Rank these by highest contribution
4. Create the plan: share out resource by rank

Buy from external source if demand is unsatisfied