BREAK EVEN POINT Flashcards
MANAGERS DECISIONS
Managers have to make decisions:-
Decisions about selling prices, variable costs and fixed costs.
How to use economically, company resources, to achieve company objectives.
ACCURATE DECISIONS
They must be able to accurately predict levels of cost and revenue based on decisions that:-
Have been made
Or are to be made
DECISIONS SUCH AS
Should the selling price be increased or decreased,
IF SO
what would be the effect on the volume of sales.
Should advertising and sales promotions be increased.
How many units should be undertaken and when?
Should the selling price be increased or decreased, and what would the effect on the volume of sales.
Should there be a loss leader.
Should advertising and sales promotions be increased.
COST BEHAVIOUR
Within most organisations, costs tend to follow two patterns
They tend to remain constant, regardless of operating level, these are called fixed costs.
They tend to vary with changes in operating level, these are called
variable costs.
FIXED COSTS
These remain unchanged regardless of the number of people attending an event / venue.
Examples: -
Rent of venue
Insurance of the venue, machinery
Depreciation of equipment, especially audio-visual, computers, lighting equipment
Minimum attendance crew, for example security staff.
VARIABLE COSTS
These vary with directly and proportionately with the level of activity -
Hospitality staff
Materials used in producing meals
Power
SEMI FIXED OR SEMI VARIABLE COSTS
Costs with both a fixed and variable element
Telephone costs- the line rental is fixed the charges per call depend on usage ( activity)
Where the costs increase when certain levels of activity are achieved Supervisors Additional Power Generators Safety staff Storage space
COST- VOLUME- PROFIT ANALYSIS
An understanding of the behaviour of cost is an essential management skill, needed in decision making.
Predicting the effect on cost, revenue and ultimate profitability outcome on the decision made.
QUESTION
Your company - produces a single product- The selling price is £10 per unit,
Fixed costs are £20,000 per annum
Variable costs are £6 per unit.
How many units do we have to sell to fully recover our fixed costs?
How many units do we have to sell to make a profit of £10,000?
QUESTION ANSWERS
Selling Price per unit = £10
Variable costs per unit = £6
Contribution per unit of £4
Answer 1 = £20,000 divided by £4 = 5,000 units
Exam tip- check the answer you have.
CONTRIBUTION
What is contribution?
It is the income provided by a product’s sale price after taking away the variable costs of a product:
Sales Revenue - Variable Cost = Contribution
It is the ‘contribution’ towards Fixed Costs and Profit
Contribution - Fixed Costs = Profit.
BREAK EVEN POINT
Break-even point (in units) =
Fixed Costs = X units
Contribution per unit It’s always a good idea to calculate the contribution first in any question about break- evens.
TARGET PROFIT
target profit (in units) =
Fixed Costs + Required Profit = Y units
Contribution per unit
Break Even Analysis Formulae
1.Break Even Volume =
Fixed cost
Contribution per unit
2 Profit = Total Contribution - fixed cost
3 Volume of sales to achieve a required profit =
Fixed cost + profit required
Contribution per unit
4 Profit to volume ratio =
Contribution per unit x 100
Selling Price
5 Margin of Safety = Budgeted capacity – break even capacity
QUESTION 2
Selling Price per unit = £10
Variable costs per unit = £6
Contribution per unit of £4
Answer 1 = £20,000 divided by £4 = 5,000 units at £10 each = £50,000
Exam tip- check the answer you have.
Selling Price per unit = £10
Variable costs per unit = £6
Contribution per unit of £4
Answer 2 = £20,000 + £10,000 = £30,000 now divide by £4 = 7,500 units x £10 per unit = £75,000
Exam tip- check the answer you have.
