Slides 12 Flashcards
What does break-even analysis (BEA) illustrate?
The relationship between volumes produced and sold by a firm, and its operating income.
What are the determinants of operating income?
- Structural determinants
- Volumes
- Purchasing and selling prices
What does operating income equal?
Sales revenue - operating costs.
What is production capacity?
The concept of maximum capacity.
What are economies of scale?
Cost advantages that firms obtain due to scale of operation.
What is the definition of vertical integration?
A strategy where a company purchases its supply chain, such as Ikea purchasing forests for raw materials.
What is horizontal integration?
A strategy where a company acquires another company in the same industry, such as Marriott acquiring Sheraton.
What is the difference between purchasing prices and selling prices?
- Purchasing prices: price of inputs from suppliers
- Selling prices: price of outputs sold to consumers
How do different volumes influence operating profits?
By changing both total costs (via variable costs) and revenues.
What factors affect purchasing and selling prices?
- Internal factors (e.g., negotiating power)
- External factors (e.g., industry trends, competition levels)
What are variable costs?
Costs that have a strong and direct link with production and sales volume.
Give examples of variable costs.
- Raw materials
- Sales commissions
- Delivery charges
What are fixed costs?
Costs that have no strong and direct link with production and sales volume.
Give examples of fixed costs.
- Rent
- Depreciation
- Legal and administrative consulting
How is labor classified as a cost?
Labor can be a variable cost if easily adjusted, but may entail fixed costs due to regulations.
What is the formula for total costs (TC)?
TC = VC + FC.
What is the operative break-even point (BEP)?
Amount of sales that allows the firm to cover its operating costs.
What is contribution per unit (CPU)?
The net cash flow from a single transaction, calculated as Revenue per unit - Variable Cost per unit.
What happens at the break-even point?
Firms start to make an operating profit.
What is total contribution?
The net cash flow from a single transaction multiplied by total quantity of units.
What is the formula for operative BEP in quantity (QBEP)?
QBEP = FC / CPU.
What does the break-even point in revenues (sales version) calculate?
It is calculated with the percentage contribution margin.
What is the contribution margin (CM%)?
CM% = CPU / Ru.
What are operating risks linked to?
The organization’s economic structure’s break-even point and degree of operating leverage.
What is operating leverage?
The size of the wedge between revenues and total costs above and below the break-even point.
How does a rigid cost structure affect a firm?
It reacts poorly to drops in volumes and positively to increases in volumes.
What is operating elasticity?
The relationship between total variable costs and fixed costs at the break-even point.
How is operating elasticity measured?
OE = VC BEP / FC.
What is the implication of high operating elasticity?
The lower the risk.
What is the relationship between operating elasticity and risk?
The higher the operating elasticity, the lower the risk.
What formula is used to calculate Operating Elasticity (OE)?
OE = VC_BEP / FC = (VC_U * Q_BEP) / FC
What is the first step to calculate Operating Elasticity?
Calculate the quantity at which the firm breaks even.
What does Operating Elasticity graphically reflect?
The wedge between the lines of total revenues and total costs.
What does a wider wedge between total revenues and total costs indicate?
Higher risk.
What is the formula to calculate the Break-Even Point (BEP)?
Q_BEP = FC / CPU
What are the financial parameters for Plant A?
- Price: 12
- VC_U: 1.30
- FC: 10,000
What are the financial parameters for Plant B?
- Price: 12
- VC_U: 1.20
- FC: 15,000
What is the calculated Operating Elasticity (OE) for Plant A?
OE = (1.30 * 934.58) / 10,000 = 0.121
What is the calculated Operating Elasticity (OE) for Plant B?
OE = (1.20 * 1,388.89) / 15,000 = 0.111
What defines the Profit Point?
Sales volume that covers all costs and provides an acceptable net income.
How do you calculate the output necessary to earn a target net income?
Volume = (FC + target net income) / (Ru - VCu)
What is the Profit Point example’s fixed cost (FC)?
10,000€
What is the average revenue per unit (Ru) in the Profit Point example?
5€
What is the variable cost per unit (VCu) in the Profit Point example?
2€
What is the revenue necessary to earn 5,000€ as target net income?
Revenue = (10,000€ + 5,000€) * 3/5 = 25,000€
In the food store example, what is the average price for a meal?
16,00€
In the food store example, what is the average cost for a meal?
4,00€
What are the total fixed costs in the food store example?
405,000€
What is the target net income in the food store example?
75,000€
What is the formula for calculating Total Operating Income (TOI)?
TOI = Financial charges + Non-income taxes + Income before income taxes
What is the TOI calculated in the food store example?
180,000€
How is the revenue calculated in the food store example?
Revenues = FC + TOI / CM%
What is the calculated number of meals in the food store example?
48,750 meals
