Break even analysis Flashcards
What is unit contribution formula?
sale Price- variable cost per unit
What are the 2 formulas for total contribution?
Contribution X number of units
Sales revenue – total variable costs
What is contribution used for?
Prioritise output and make decisions
Calculating profit
How can contribution prioritise output and help make decisions?
Useful for a business that sells multiple products or services to see which contribute more to overall business
What is the formula for calculating profit from contribution?
Profit= total contribution–Total fixed costs
What would the contribution be if selling price was 35 and variable cost per unit was 37?
(2)
What would total contribution be if contribution per unit was 7 and # of unit sold is 100?
700
What would the profit of a business be if output is 500 units, contribution per unit is 5 and fixed costs are 1200?
1300
What is the break even point?
level of sales/ output where total costs are equal to total revenue
If the business making a profit or loss when at break even point?
neither
What does it mean if output is below break even point?
a loss will be made
What does it mean if output is above break even point?
profit is made
Why do firms use break even analysis?
Calculate in advance sales needed to break even
See how changes in sale/output affect profit
Changes in cost price affect breakeven and profit
Level of output/sale needed to reach target profit
What is the formula for breakeven point?
Total fixed costs/Unit contribution (selling price- variable cost)= Units
What is the breakeven point if fixed costs are £60,000and contribution is £60?
1,000 units
What is the break even safety margin?
the margin of safety is the amount by which sales exceed the break-even point
What is the margin for safety if the breakeven point is 300 and current production is 400?
100
33.33% (production above break even point/ unit to break even x100)
What would profit be if total safety margin is 8 and contribution per unit is 126.5?
1012
What 3 considerations must a business bear in mind when establishing pricing policy?
Establishing an acceptable return on capital
Understanding the relationship between fixed and variable costs
Knowing the price that the market will bear
What must you do when using the considerations for pricing policy?
Cannot be considered independently must all be taken into account
What must be considered when deciding an acceptable return on capital for pricing policy?
Business objective of giving suitable return to investors
Investors will withdraw their funds if better opportunities elsewhere
Sufficiently high selling price should be established to provide adequate return
How should special orders be priced?
less than absorption cost but above marginal cost
What does a business need to do to make a profit? (break even)
selling price needs to be set so that fixed costs are more than covered by the contribution from sales any surplus after fixed cost is profit
Example of why relationship between fixed and variable costs must be understood?
Possible to carry out manufacturing process in 2 different ways 1.labour intensive (few inexpensive machines) 2.costly machines but few operators
First method- variable cost high but fixed costs are low
Second method- variable costs low but fixed costs are high