Breakeven analysis and limiting factor analysis

Question 1

What is the breakeven point ?

Answer 1

When profit = 0

Question 2

How do you calculate Profit ?

Answer 2

Total Revenue - Total Variable costs - Total Fixed costs.

Question 3

When do you break even ?

Answer 3

Contribution = TFC

Question 4

How do you calculate BEP (Quantity) ?

Answer 4

BEP in units = TFC / CPU

Question 5

What is the Contribution Ratio ?

Answer 5

The CS Ratio measures how much contribution is earned from each £1 of sales.

Question 6

What are the calculations for CS Ratio?

Answer 6

CS Ratio = Total Contribution / Total Revenue
or
CR Ratio = CPU / Selling price per unit

Question 7

What is the BEP in terms of Sales Revenue ?

Answer 7

Fixed Costs / Contribution Ratio
or
BEP Sales = FC / CPU x SP

Question 8

What is the Margin of Safety ?

Answer 8

The amount that anticipated sales can fall below budget before a business no longer makes a profit.

(How much units can drop before making a loss)

Question 9

How is Margin of Safety calculated ?

Answer 9

MoS = Budgeted Output - Breakeven Output
or
MoS (as a % of budgeted sales) = (B. output - BE. output) / B. output
x 100

Question 10

How is Sales Volume for a Target Profit (units) calculated ?

Answer 10

FC + Target profit / CPU

Question 11

How is Sales Revenue for a Target Profit calculated ?

Answer 11

FC + Target profit / CS Ratio
or
[FC + Profit / CPU] x Sales price

Question 12

What is the main differences between a Breakeven chart and a Contribution breakeven chart ?

Answer 12

Breakeven shows a fixed cost line but Contribution shows a variable cost line.

Question 13

What is a Limiting (or Key) Factor ?

Answer 13

A LF is a F of scarce resource which prevents a company from achieving level of activity it would like to.

Question 14

What could be some examples of ‘scarce resources’ ?

Answer 14

Labor hours
Materials
Machine hours
Factory space

Question 15

What is the general idea of a Limiting Factor ?

Answer 15

So that a business can calculate an optimal production plan if there is a limit on production.

Account for the thing that’s getting in the way…

Question 16

What is the rule of Limiting Factor Analysis if there is 1 LF?

Answer 16

The rule is to maximize CPU of the limiting factor.

Question 17

State the steps in the Limiting Factor Analysis / KFA method.

Answer 17

1. CPU for each product.
2. CPU of LF for each product.
3. Rank products in order of CPU of the LF.
4. Allocate resources using ranking and answer question.

Question 18

There may be circumstances where production is restricted by something other than a scarce resource.
Give examples of what this Limiting Factor could be.

Answer 18

Contract with customer cant be cancelled.
Minimum quantity of each product must be produced to maintain customer goodwill.

Question 19

What happens when demand exceeds production capacity ?

Answer 19

A firm will need to decide:
1. whether to buy in resources from external suppliers.
2. which products to make themselves and which to outsource.

Question 20

What are the steps that could be adopted with a ‘Make vs Buy’ question in the presence of a LF ?

Answer 20

1. Saving per unit of each product.
   Saving = Ext purchase price - Int variable cost to make.
2. SPU of LF.
   Saving / amount of LF each product uses.
3. Rank products.
   Higher SPU of LF, Greater priority to make given to product.
4. Scarce resource allocated to products in order of priorities, until fully used up.