Decisions Flashcards
Financial Decisions
- Decisions that best maximise finances
- If the business can afford
- How they are going to pay for expenses and liabilities
- Loans/investments
Margin of Safety:
Units/volume
Dollars/Revenue
Percentage
Volume = actual sales - break even
Dollars = actual sales revenue - break even sales revenue
Percentage = (actual sales - break even sales / actual sales volume) x 100
Sales Revenue
Selling price x quantity of output sold
Margin of Safety
The amount by which current sales fall before the business will only break even and earn zero profit
Selling Price
The price at which each unit is sold
Contribution Margin per Unit
Selling price less variable cost
SP - VC
Break even Sales
Break even units x SP
Making a profit
Units to produce given a level of profit
Fixed cost + profit / contribution margin
FC + profit / SP - VC
Cash Budgets
Main purpose is to determine whether or not the business will generate sufficient cash from sales to pay its operating expenses, repay debts and to pay for assets and finally to cover all disorders drawing/dividends of the owners
Break even
The number of units and/or sales dollars at which the business will just cover it variable and fixed cost and earn zero profit
Fixed Costs
Costs remain constant over relevant range of activity. Production capacity is reflected in fixed costs items such as interest/ depreciation
Remain constant over all levels of output
Contribution Margin Equation
Sales - VC
Contribution Margin
The amount left from each sale after variable cost have been accounted for.
This amount is then available to contribute to fixed cost and earn profit.
If the contribution Margin just covers fixed costs, then the business will break even and earn no profit
Relevant Range
Range of output possible given the firms current resources.
Zero to maximum output.
Beyond relevant range Mac the business will have to purchase more resources.
Break even units
Fixed costs \ SP - VC
