Cost, Revenue, Profit Relationship (CH 20) Flashcards
1
Q
Profit Formula
A
Revenue - Cost
2
Q
Contribution Meaning
A
The profit made on each product. (Used to calculate break-even point)
3
Q
Contribution Formula
A
Selling Price - Variable cost per unit
4
Q
Break Even Point Meaning and Formula
A
Where Revenue meets cost
Total Costs= Total Sales Revenue
5
Q
Total Contribution Formula
A
Contribution per unit x no. units sold
6
Q
Margin of safety Meaning
A
Difference between the actual level of output and break-even level of output
7
Q
What does Margin of Safety Show?
A
How much a firms sales can fall before it reaches the break-even point
8
Q
Purpose of Break-Even Analysis
A
- to inform pricing decision
- to predict profit
- to seek finance
- to conduct ‘what if’ analysis
9
Q
Break-Even limitations
A
- Fixed cost doesn’t change with output
- Everything produced is sold (not always the case+
- Variable cost per unit is the same
- Selling price per unit is constant and doesn’t change with quantity produced
