15. Breakeven Analysis and Limiting Factor Analysis Flashcards
What is the number of units sold to breakeven?
Fixed costs / Contribution per unit
How do you calculate the breakeven revenue?
Breakeven units x selling price per unit
OR
Fixed Costs/ C/S Ratio
What is the C/S ratio?
Contribution/Sales
What is the margin of safety?
The margin of safety indicates the percentage by which forecast revenue exceeds or falls short of that required to break even
What is the equation for margin of safety (units)?
Budget sales units - Breakeven sales units
What is the equation for margin of safety %?
Budget sales units - Breakeven sales units)/Budget sales units
How do we calculate units sold in order to achieve target profit?
(Fixed Costs + target profit)/ contribution per unit
How do we calculate revenue required in order to achieve target profit?
(Fixed Costs + target profit)/ C/S ratio
What are limitations of breakeven analysis?
We assume constant fixed costs at any output level, constant variable costs per unit and selling prices, and no change in inventory levels
Can only be applied to a single product or constant product mix scenario
What is a limiting factor?
Anything which limits the activity of an entity, such as shortage of supply of a resource or restriction on sales demand
How do we identify the limiting factor?
Calculate whether materials/labour/demand available meet the maximum demand
What is the optimum production plan?
The one which maximizes the contribution given the availability of the single limiting factor
How do we find the optimum production plan?
- Rank products in order of their contribution per limiting factor
- Work out the optimum production plan (produce as much as possible of the product with the highest contribution, and then so on)
