Chapter 3

Question 1

Break Even Point?

Answer 1

Fixed Costs / Contribution per unit

Question 2

Target profit point?

Answer 2

(Fixed Costs + Target Profit) / contribution per unit

Question 3

What is operating gearing?

Answer 3

Relationship between fixed and variable costs
the higher fixed costs, the higher gearing
therefore small change to output can have high change on profit
high gearing increases sensitivity of profit
capital intensive industries have high operating gearing

Question 4

Weaknesses of Break even analysis?

Answer 4

based on linear relationship
stepped fixed costs can causes issues
not good for multiproduct business as different sales mixes affect each other and hard to pinpoint fixed cost to one product
Very dangerous to do outside of volume range

Question 5

How many businesses use break even analysis?

Answer 5

62%

Question 6

Marginal analysis

Answer 6

only looks at costs and revenues that vary with the decision being considered, marginal cost is the minimum price a business can offer a product , must consider implications of selling at different prices

Question 7

What is required for in house instead of outsourcing?

Answer 7

if at spare capacity: Variable cost < outsourced price

if at full capacity: variable cost + opportunity of lost contribution < outsourced price

Question 8

What is condition for closing down a business?

Answer 8

fixed cost saved > contribution lost

department can make a loss but still have positive contribution

Question 9

Limitations of CVP analysis?

Answer 9

1. Assumes relationship linear between sales revenue and output, cost and output
2. dangerous to use outside of relevant range of activity
3. assumes costs are matched to income, no change in stock levels over period
4. Multiproduct businesses have multiple BEP, interelation etc.
5. Different to apply for job costing businesses