Breakeven analysis and limiting factor analysis Flashcards
What is breakeven point?
Fixed costs / contribution per unit
What is breakeven revenue?
Breakeven point x sales price
Fixed costs/C/S ratio
What is the margin of safety and how is it calculated?
The number sales would need to drop by before a loss is made
Units = Budgeted sales units - breakeven sales units
% = (Budgeted sales units - breakeven sales units)/budgeted sales units
What is the formula for units sold to achieve target profit?
(Fixed costs + target profit)/ contribution per unit
What is the formula for units revenue to achieve target profit?
(Fixed costs + target profit)/C/S ratio
What are the limitations of breakeven CVP analysis and breakeven charts?
Only applied to single product or constant mix
Time consuming
Assumes sales price per unit, variable cost per unit and total fixed costs are constant
Assumes we produce same number of units as we sell
How do we work out limiting factor analysis?
1) Calculate material and labour required to produce maximum sales demand
2) Work out the product with the highest contribution per unit of limiting factor
3) Make enough units of the top-ranked product and work out how much is left. Then make as much of the 2nd ranked product
What is the extra step to limiting factor analysis when we have minimum requirements?
Rank in the normal way but take into account the minimum production
What are the steps required for a make-or-buy question?
1) Identify the extra cost of buying in vs making it ourselves for each product
2) Calculate the extra cost of buying in per unit of scarce resource saved for each product
3) Rank products in ascending order of extra cost per unit of scarce resource saved (starting with smallest)
4) Buy in enough of the top-ranked products to enable us to make the lower-ranked products in-house
