Cost Volume Profit Analysis Flashcards
How can fixed costs be classified?
They remain constant/fixed when changes occur to the volume of activity
How can variable costs be classified?
They vary according the volume of activity
What does a graph of fixed cost against the volume of activity look like?
A straight horizontal line
x axis = volume of activity in units of output
(y axis = cost in pounds)
What does the graph of rent cost against the volume of activity look like?
stairs from left to right (increasing) (_|-)
What does the graph of variable cost against the volume of activity look like?
An upwards sloping straight line
How do you calculate the break even point?
= fixed cost / (sales revenue per unit - variable costs per unit)
How do you calculate the contribution margin ratio (CMR)?
Contribution/ sales revenue * 100%
How do you calculate the target profit?
t = fixed cost + target profit / sales revenue per unit - variable cost per unit
t is the required no. of units of output to achieve the specific target profit
What are the weaknesses of break even analysis?
3 general problems:
1) non linear relationships
2) stepped fixed costs
3) multi product businesses
What is a semi variable cost with an example?
The cost has elements of both fixed and variable costs
Electricity cost in a hairdressers
heating and lighting is most likely fixed
power for hairdryers is most likely variable with volume
What is total cost at zero activity?
= the fixed cost
What is the profit/loss?
the diff. between sales revenue and total cost = the vertical distance between the total sales revenue line and the total cost line at a specific volume of activity
When is the volume of activity at break even point (BEP)?
when there is NO distance between the total sales revenue line and the total cost line
What happens when the volume of activity < BEP?
A loss will be incurred as total costs > total revenue
What happens when the volume of activity > BEP?
There’s a profit because total revenue > total cost
What is the high-low method?
it involves taking the highest and lowest total electricity figures for example from the range of past quarterly data available and then assume the difference is caused entirely by variable costs
What is a weakness of the high low approach?
it relies on 2 points only in a range of information relating to quarterly charges
it ignores ALL other information
In break even analysis what is the total cost at zero activity?
the amount of the fixed cost
Is there zero sales revenue when there is zero volume of activity?
YES
How to calculate profit?
total sales revenue - total cost
What is the break even point?
when total sales revenue = total cost
In break even analysis, when is a loss incurred?
when the volume of activity is below the BEP
- because total costs exceeds total revenue
How to calculate the number of unit.s of output at BEP , b?
b = fixed cost / sales revenue per unit - variable cost per unit
What is contribution per unit?
sales revenue per unit - variable cost per unit
What is the margin of safety?
the extent at which the planned volume of output/sales lies above the break even point
what can the margin of safety be used as?
a partial measure of risk
What is operating gearing?
the relationship between contribution and fixed cost
When is an activity said to have high operational gearing?
when an activity has a relatively high fixed cost in comparison to the total variable cost (at its normal level of activity)
Which costs are only considered for marginal analysis?
only costs and revenues that vary with decision
usually fixed costs can be ignored
What are the 4 main areas that marginal analysis can be used for decision making?
1) pricing / assessinh opportunities to enter contracts
2) determining the most efficient use of scarce resources
3) make-or-buy decisions
4) closing or continuation decisions
What is the marginal cost?
the minimum price at which the business can offer a product or service for sale
When is a marginal cost approach used?
when the opportunity to sell at a price to cover the full cost is not available
What is the guiding principle for managers making decisions relating to the use of scarce resources?
the most profitable combination of products will occur when the contribution per unit of the scarce factor is maximised
what is outsourcing?
obtaining services or products from a sub-contractor
How are make-or -buy decisions made?
take the action that leads to the highest total contribution
how should closing/continuing activities be assessed?
by the net effect on total contributions
