Breakeven Flashcards
What is Breakeven?
The point at which we make neither a profit nor a loss.
How can breakeven be expressed?
Either:
- the number of units that we need to produce to reach breakeven
- the revenue required to reach breakeven
What is the C/S ratio?
The contribution/sales ratio is a measure of profitability it indicates the amount of contribution a product generates for every one unit sold.
The higher the c/s ratio the more quickly contribution grows as sales increase. Therfore, products with a hight c/s ratio will accumulate profits more quickly (once they pass the breakeven point) than a product with a lower ratio.
What is the margin of safety?
The amount by which sales can fall from expected before a loss is made. It is a measure of risk as it gives the company an idea of how secure it is with decreased sales before no longer making a profit.
How can the margin of safety be expresed?
It can be expressed in units but is often expressed as a percentage of projected sales.
What is a breakeven chart?
- A graphical representation of the breakeven position when considering a single product.
- It shows the sales revenue mapped against the total and variable cost lines
- From this you can identify the level of fixed cost, the breakeven point and the contribution at given points.
Draw a simple breakeven chart and identify the key points.
What is a Multi-Product CVP Graph?
A graph which represents the breakeven point of multiple products by calculating a weighted average c/s ratio.
Each of the different products will have different selling prices, costs, contribution margins and the BEP will depend on the mix in which the products are sold.
What does the straight line on a multi-product CVP Graph represent?
The straight line shows the profits and losses if the products were sold in the standard mix, with the point where this line crosses the y-axis being the breakeven point.
What does the arced line on a multi-product CVP Graph represent?
The arced line is based on the company selling the most profitable products first. These products will have a steeper gradient. The c/s ration is used to determine this level of profitability.
On a Multi-Product CVP graph what is the point where the lines meet on the x-axis?
This is the point at which revenue is nil and equates to the fixed costs for the company. These costs, being fixed will always be incurred regardless of the activity and will need to be covered by the revenue before a profit can be made.
Draw a Mult-Product CVP Graph.
What are the benefits of CVP analysis?
- It is useful to graphically highlight the significance of the breakeven point, margin of safety and fixed costs. Analysis of these points can be vital to ensure we are profitable and take measures to boost revenue or reduce costs where necessary.
- It clearly shows the significance of certain products within the current product mix to the company’s overall profitability
What are the limitations of CVP analysis?
- Relies on forecast data which is only an estimate.
- Makes assumptions of constant price, constant fixed and variable costs and constant levels of efficiency and productivity. This is unlikely in a real life scenario.
- Straight line assumes the mix of sales is a pre-determined mix and will remain constant for all levels of activity.
- Arced line ammes the products can be sold in order of profitability
- Assumes all costs can be divided into fixed and variable elements. In realiy all costs are variable in the long term.
