10: Breakeven Analysis Flashcards
Reminder on what the contribution calculation is?
Variable costs (total or per unit)
What is the breakeven point and what’s the calculation in units?
It’s when the profit is 0!
BEP in units = total fixed costs / contribution per unit
What are the three steps to doing a BEP question? In units
- Determine the contribution per unit
- Add up the fixed costs
- Put in the equation
Total fixed costs
————————
Contribution per unit
What is the breakeven point calculation in revenue?
Total fixed costs
————————
Contribution ratio
What is the contribution ratio?
Contribution
——————
Sales
Can be done in total
Or per unit
😊
What can you do with the contribution ratio if given it?
Can use it like a gross profit margin
To figure out the selling profit and CoS!
What is the margin of safety?
The level of sales between:
the budgeted sales and the breakeven point
So the amount sales can fall while you still make a profit!
What are the two MoS calculations?
Units =
Budgeted output - breakeven output
% =
Budgeted output - breakeven output
—————————————————
Budgeted output
X 100
Steps to doing a BEP question with revenue?
Find the contribution ratio!
Then put into the calc 😊
Steps to doing a MoS question?
- Determine the breakeven point
- Determine the budgeted point (if you need to)
- Put in formula
What are profit targets?
How many units or revenue they need to do in order to achieve a certain level of profits
What is the calculations for profit targets?
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
What are the assumption and limitations of BEP?
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
The difference between a traditional breakeven chart and contribution breakeven chart?
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
Reminder, what is a limiting factor? And what can we do with it?
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!
What are the three steps for identifying the limiting factor?
- Find the total amount that is needed to hit target
- Add this up, if separate products!
- Is that within the limits of the resources available to us?
Is yes, it’s not the limiting factor!
What is limiting factor analysis?
Maximising the contribution per unit of the limiting factor
What are the four steps for creating an optimal production plan?
- Calculate the CPU for each product
- Calculate the CPU of the limiting factor
(contribution / amount of resource per unit) - Rank these by highest contribution
- Create the plan: share out resource by rank
What else can be a limiting factor?
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
What is a make or buy decision?
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
What are the four steps to a make or buy decision?
- Calculate the saving per unit of internal production
(external purchase price - variable costs of making) - Calculate the SPU of the limiting factor
(saving / amount of resource per unit) - Rank these by highest contribution
- Create the plan: share out resource by rank
Buy from external source if demand is unsatisfied
