Session 8 - Short term decisions

Question 1

What is meant by short term decisions?

Answer 1

Maximum of a year ahead

Question 2

How to work out contribution?

Answer 2

Selling price - Variable costs

Question 3

What is the break even formula in units?

Answer 3

Fixed costs divided by contribution per unit

Question 4

What is the formula for break-even in sales revenue?

Answer 4

Break-even point (units) x Selling price per unit

Always round up to next whole number of units

Question 5

How to work out profit using contirbution?

Answer 5

Contribution - Fixed costs = Profit

Question 6

What are relevant and irrelevant costs?

Answer 6

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

Question 7

What does breakeven analysis show us?

Answer 7

The amount of output needed to produce to break even.

Sometimes referred to as Cost volume analysis

Question 8

What does the margin of safety show us?

Answer 8

Amount by which sales exceed the break even point.

Question 9

What is the margin of safety formula as units?

Answer 9

Budgeted sales volume - Breakeven sales volume

Question 10

What is the margin of safety formula as a percentage?

Answer 10

Budgeted sales volume - Breakeven sales volume/ Budgeted sales volume x 100

Question 11

What is the target profit formula in units?

Answer 11

Fixed costs + Required Profit / Unit contribution

Question 12

What is the target profit formula in revenue?

Answer 12

fixed costs + target profit / PV ratio

Question 13

What is the profit volume ratio?

Answer 13

Contribution/Selling price x 100

Question 14

How is the profit volume ratio used during break-even analysis?

Answer 14

Fixed costs/PV ratio

Question 15

What does the profit volume ratio show us?

Answer 15

How much contribution is earned from each £1 of sales

Question 16

What is special order pricing?

Answer 16

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

Question 17

When is break-even analysis used?

Answer 17

Before starting a new business
When making changes
To measure profits or lossess

Question 18

What can the profit volume ratio help work out?

Answer 18

sales value required to geenrate a target profit

Target profit + fixed costs / %

Question 19

What can the margin of safety percentage help work out?

Answer 19

Variable costs

Sales revenue x MOS% = Variable costs