Breakeven Analysis Flashcards
COSTS
FIXED, VARIABLE, SEMI-VARIABLE, TOTAL COSTS
FIXED COSTS (FC)
They don’t change with the level of output/production (rent, salaries)
VARIABLE COSTS (VC)
Linked directly to production of goods (cost of sales/cost of materials)
(ingredients, packaging, materials)
SEMI-VARIABLE COSTS (SMV)
FC and VC parts: gas, electricity phone, water
FC part: standing charge, pay to stay connected to the supply
VC part: is the plus usage
TOTAL COSTS (TC)
fixed costs+variable costs+semi variable costs
TC=FC+VC
BREAKEVEN GRAPH KEY POINTS
- breakeven point is always in units
- total revenue (sales starts always from 0)
- total cost (TC=FC+VC) always starts from fixed costs line
- fixed costs never changes always horizontal
- profit=after the BEP
- loss=below the BEP
- margin of safety=difference between the current level of output and the breakeven level of output
FORMULA FOR BREAKEVEN POINT IN UNITS
SELLING PRICE (PER UNIT) - VARIABLE COST (PER UNIT)
=
number of units to sell to cover all costs
FC ------------------- contribution = how much each unit contributes to paying FC (sp-vc)
FORMULA FOR BREAKEVEN (SALES VALUE)
breakeven point x selling price
CONTRIBUTION PER UNIT FORMULA
selling price-variable cost per unit
TOTAL CONTRIBUTION FORMULA (2)
1) total revenue - total variable costs
2) contribution per unit x number of units sold
PROFIT FORMULA (4)
1) total revenue - total costs
2) contribution per unit x margin of safety
3) total contribution - fixed costs
4) (mos x sp) - (mos x vc)
TOTAL REVENUE FORMULA
selling price x quantity sold
TOTAL COSTS FORMULA
total fixed costs + total variable costs
MARGIN OF SAFETY UNITS FORMULA
sales - breakeven level of output
MARGIN OF SAFETY VALUE FORMULA
margin of safety (units) x selling price per unit
CONTRIBUTION ADVANTAGES AND DISADVANTAGES
Advantages:
1) A business is able to see whether the products it produces actually cover their own variable costs
2) This is used to set the price of the product in relation to direct production costs
Disadvantages:
1) Contribution per unit may be very low, so the business will need to sell a large number to cover the fixed costs
2) Contribution per unit on certain products may be extremely high
3) In each case the contribution per unit is distorted and may not be valuable
WHY DO BREAKEVEN ANALYSIS?
1) Planning
2) Monitoring
3) Control
4) Target Setting
BREAK EVEN ANALYSIS ADVANTAGES AND DISADVANTAGES
Advantages:
1) Can set targets that motivates employees
2) Identifies fixed and variable costs
3) Easy way to calculate profit or loss at any level of output
4) Can identify if costs are too high allowing the business to look for ways of lowering costs
Disadvantages:
1) Does not take account of variations in costs or selling price
2) Target sets may be too high creating stress
3) Sales may not be achieved, even though the break even point is known it may not be achieved
WHY IS FOCUSING ON CONTRIBUTION IMPORTANT?
1) Calculates the amount each product contributes towards paying total fixed costs
2) Can help set prices to optimise the contribution (profit of each)
3) Focusing on maximising contribution helps to ensure better liquidity
4) Can help reduce variable cost
5) May lead to negotiation with existing supplier on a better price
6) Could mean switching supplier to a cheaper alternative