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Operational Case Study > P1 - Breakeven and Limiting Factor Analysis > Flashcards

P1 - Breakeven and Limiting Factor Analysis Flashcards

1
Q

What does it mean to break even?

A

Make zero profit, but also zero loss

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2
Q

When will a product break even?

A

When total contribution = total fixed costs

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3
Q

How do you calculate breakeven units?

A

Fixed costs divided by contribution per unit

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4
Q

How do you calculate breakeven revenue?

A

Fixed costs divided by C/S ratio

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5
Q

What is the margin of safety?

A

The percentage by which forecast revenue exceeds or falls short of that required to break even

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6
Q

How do you calculate margin of safety units?

A

Budgeted sales units - breakeven sales units

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7
Q

How do you calculate margin of safety percentage?

A

Budgeted sales units - breakeven sales units, divided by budgeted sales units

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8
Q

How do you calculate number of units sold to achieve a target profit?

A

Fixed costs plus target profit, divided by contribution per unit

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9
Q

At what point on a breakeven chart can you find the breakeven units?

A

Where total revenue and total cost intersect

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10
Q

What does a breakeven chart show?

A

The link between sales volumes, revenue and cost

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11
Q

What does a profit/volume chart show?

A

The relationship between sales volume and profit

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12
Q

What loss does a business make if it sells no units?

A

Equal to the total fixed costs

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13
Q

At what point on a profit/volume chart can you find the breakeven point?

A

Where the breakeven line crosses the x axis

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14
Q

What are the 3 main assumptions made in breakeven analysis?

A
  1. Fixed costs are constant at all output levels
  2. Constant variable cost and selling price per unit
  3. No change in inventory levels, sales volume = production volume
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15
Q

What are the 2 main assumptions made in multi product breakeven analsysi?

A
  1. Constant product mix, or

2. All products with identical c/s ratio

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16
Q

What does the difference in gradient on a multi product profit/volume indicate?

A

Different c/s ratios - the steeper the gradient the higher the ratio (left to right)

17
Q

What use is sensitivity analysis when used with breakeven analysis?

A

To know what the impact on profitability and breakeven position might be if some of the volume, price and cost assumptions change

18
Q

What is operational gearing?

A

The proportion of costs that are fixed

19
Q

Do businesses with high operational gearing have high or low c/s ratios?

A

High - variable costs are low

20
Q

What 3 things does high operational gearing result in?

A
  1. A high breakeven point
  2. Elastic profitability
  3. Steeper profit line on the P/v chart
21
Q

What is a limiting factor?

A

Resources which prevent an organisation expanding output

22
Q

What are the 4 steps to determine the optimum use of resources when there is a single limiting factor?

A
  1. Identify what the limiting factor is
  2. Calculate the contribution per unit of limiting factor
  3. Rank the products according to the contribution per unit of limiting factor
  4. State the optimum production plan
23
Q

What is linear programming?

A

An algebraic technique to establish the optimum use of resources when there is more than one limiting factor

24
Q

What is the shadow price of a resource?

A

How much more it is worth paying in order to obtain more of a particular resource

25
Q

How do you calculate the shadow price?

A

The increase in contribution available if one more unit of the resource is obtained

26
Q

What is the shadow price of a non scarce resource?

A

Nil

27
Q

What is slack?

A

The surplus or spare capacity of a particular constraint

28
Q

How do you calculate slack of a resource?

A

The difference between their current usage and their maximum availability

29
Q

What 3 types of technology can be used to help businesses with resource decisions?

A
  1. Solution tools e.g. linear programming
  2. What if analysis tools
  3. Visualisation tools
30
Q

What are the 3 issues that occur with using technology in resource decisions?

A
  1. Cost of expensive software
  2. Tools hide important details
  3. Cannot identify data input problems

Operational Case Study (10 decks)

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