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
cost volume profit analysis features
- change in inventory is ignored
- change in selling price (not fixed costs) alters slope of line on PV chart
- assumption is made that all VC are constant per unit
what type of cost is a direct cost
variable
which 3 situations would cause a profit/volume chart slope to decrease
An increase in the direct material cost per unit.
An increase in the trade discount per unit sold.
An increase in the royalty payable per unit.
