P1 - Breakeven and Limiting Factor Analysis Flashcards
What does it mean to break even?
Make zero profit, but also zero loss
When will a product break even?
When total contribution = total fixed costs
How do you calculate breakeven units?
Fixed costs divided by contribution per unit
How do you calculate breakeven revenue?
Fixed costs divided by C/S ratio
What is the margin of safety?
The percentage by which forecast revenue exceeds or falls short of that required to break even
How do you calculate margin of safety units?
Budgeted sales units - breakeven sales units
How do you calculate margin of safety percentage?
Budgeted sales units - breakeven sales units, divided by budgeted sales units
How do you calculate number of units sold to achieve a target profit?
Fixed costs plus target profit, divided by contribution per unit
At what point on a breakeven chart can you find the breakeven units?
Where total revenue and total cost intersect
What does a breakeven chart show?
The link between sales volumes, revenue and cost
What does a profit/volume chart show?
The relationship between sales volume and profit
What loss does a business make if it sells no units?
Equal to the total fixed costs
At what point on a profit/volume chart can you find the breakeven point?
Where the breakeven line crosses the x axis
What are the 3 main assumptions made in breakeven analysis?
- Fixed costs are constant at all output levels
- Constant variable cost and selling price per unit
- No change in inventory levels, sales volume = production volume
What are the 2 main assumptions made in multi product breakeven analsysi?
- Constant product mix, or
2. All products with identical c/s ratio
What does the difference in gradient on a multi product profit/volume indicate?
Different c/s ratios - the steeper the gradient the higher the ratio (left to right)
What use is sensitivity analysis when used with breakeven analysis?
To know what the impact on profitability and breakeven position might be if some of the volume, price and cost assumptions change
What is operational gearing?
The proportion of costs that are fixed
Do businesses with high operational gearing have high or low c/s ratios?
High - variable costs are low
What 3 things does high operational gearing result in?
- A high breakeven point
- Elastic profitability
- Steeper profit line on the P/v chart
What is a limiting factor?
Resources which prevent an organisation expanding output
What are the 4 steps to determine the optimum use of resources when there is a single limiting factor?
- Identify what the limiting factor is
- Calculate the contribution per unit of limiting factor
- Rank the products according to the contribution per unit of limiting factor
- State the optimum production plan
What is linear programming?
An algebraic technique to establish the optimum use of resources when there is more than one limiting factor
What is the shadow price of a resource?
How much more it is worth paying in order to obtain more of a particular resource
