Decision-making Flashcards
Relevant costs
Future incremental (specific to decision making) cash flow
Opportunity costs
Next best alternative
Contribution
Revenue minus variable
Breakeven (units)
Fixed costs/contribution per unit
Breakeven (revenue)
fixed costs/ contribution sales ratio (contribution/sales)
Margin of safety
definition and units/percentage
How much below budget sales would be before a sale is made
In units = budgeted sales - breakeven sales
As a percentage =(budgeted sales - breakeven sales)/ budgeted sales
Assumptions of breakeven analysis
Constant fixed costs
Constant variable cost per unit
Constant selling price
No change in inventory
Multi-product breakeven analysis
Units to breakeven = fixed costs/contribution per standard mix
Limiting factors
If more than one scarce resource rank of contribution per unit and state the optimum production plan
Shadow prices
How much more is it worth paying to obtain a resource (above what you are already paying)
Price elasticity of demand
Effect on demand when price changes
If below one it is inelastic (price has little effect of demand)
Price elasticity of demand equation
% change in demand / % change in price
Total cost function
TC = a + BQ TC = total cost a= fixed costs B = variable cost per unit Q - quantity
Marginal revenue
Continue to sell products as long as additional revenue gain from selling another item is greater than the additional cost incurred Marginal revenue = Marginal costs Marginal revenue = a - 2bQ a= fixed costs b = variable costs per unit
Price skimming
Initially charge high price to re-coup start up price and then lower the price over the life cycle
