6 - Breakeven analysis Flashcards
what is breakeven point
sales volume which will give the company a profit of $ nil
if sales exceed = profit made
breakeven analysis
analyses relationship between activity levels, costs and profits
BEP formula
breakeven when:
total contribution = fixed costs
ie,
contribution per unit x no of units = fixed costs
= fixed costs / contr per unit
breakeven level of activity
fixed costs / contribution per unit
what is contribution to sales revenue ratio
alternative of finding breakeven revenue
also known as profit - volume ratio
to give the amount of contribution earned per dollar of sales
C/S ratio formula
contribution / sales revenue
OR
contribution per unit / selling price per unit
breakeven revenue formulae
= fixed costs / contribution to sales ratio
= BEP x selling price per unit
what is margin of safety
measure of the amount by which sales must fall before we start making a loss
a loss is made if sales volume is less than BEP
margin of safety formula in units and %
UNITS = budgeted sales volume - breakeven sales volume
% = budgeted sales volume - breakeven sales volume / budgeted sales volume
where is BEP on a breakeven chart
the point where sales revenue line crosses total costs line
where is margin of safety on a breakeven chart
horizontal distance between budgeted sales and breakeven sales
where is profit/loss on a breakeven chart
amount at each activity level is vertical distance between sales revenue line and total cost line
where is BEP on a profit-volume chart
where profit line crosses horizontal axis - where profit is 0
what is the sales volume to reach required profit level formula
fixed costs + required profit / contribution per unit
limitations of breakeven analysis
the assumptions:
- all costs can be split into fixed and variable elements
- fixed costs are constant
- variable cost per unit is constant
- selling price is constant
- inventory levels are constant
