Session 8 - Short term decisions Flashcards
What is meant by short term decisions?
Maximum of a year ahead
How to work out contribution?
Selling price - Variable costs
What is the break even formula in units?
Fixed costs divided by contribution per unit
What is the formula for break-even in sales revenue?
Break-even point (units) x Selling price per unit
Always round up to next whole number of units
How to work out profit using contirbution?
Contribution - Fixed costs = Profit
What are relevant and irrelevant costs?
Relevant costs - costs which are changed by a decision eg: Contribution (selling price - variable costs)
Irrelevant costs - costs which are not affected by a decision. Eg: Fixed costs
What does breakeven analysis show us?
The amount of output needed to produce to break even.
Sometimes referred to as Cost volume analysis
What does the margin of safety show us?
Amount by which sales exceed the break even point.
What is the margin of safety formula as units?
Budgeted sales volume - Breakeven sales volume
What is the margin of safety formula as a percentage?
Budgeted sales volume - Breakeven sales volume/ Budgeted sales volume x 100
What is the target profit formula in units?
Fixed costs + Required Profit / Unit contribution
What is the target profit formula in revenue?
fixed costs + target profit / PV ratio
What is the profit volume ratio?
Contribution/Selling price x 100
How is the profit volume ratio used during break-even analysis?
Fixed costs/PV ratio
What does the profit volume ratio show us?
How much contribution is earned from each £1 of sales
What is special order pricing?
Makes use of marignal costing technique when the business is profitable and has reached its break even threshold. Additional sales can be made at a selling price above marignal cost but below absorption cost.
Already have covered the fixed costs can now sell products at a reduced price just covering the variable costs
When is break-even analysis used?
Before starting a new business
When making changes
To measure profits or lossess
What can the profit volume ratio help work out?
sales value required to geenrate a target profit
Target profit + fixed costs / %
What can the margin of safety percentage help work out?
Variable costs
Sales revenue x MOS% = Variable costs
