Unit 3.3 Flashcards
Look back at 3.3, Unit 5 on haiku
Most is graphing and calculation work
How to calculate the break even quantity (BEQ)
Fixed costs/ (price - variable costs)
How to calculate the contribution per unit (CPU)
Price - Variable costs
How to calculate the margin of safety
The amount by which the actual output exceeds the Break-even quantity
How to calculate profit
Profit = Price x Quantity - FC - VC x Quantity
Target output profit
Profit = P.Q - FC - VC.Q
However with one unkown
What happens when price increases in the BEA
Revenue line becomes steeper
Lower break even level of output
What happens when the fixed costs increases
Fixed Costs line shifts up
Higher break even level of output
Move to a new, larger shop with better machinery (so higher FC and lower VC)
Higher fixed costs, so FC line shifts up
Variable cost line becomes flatter
Total Costs Line shifts up and flattens
Lower break even level of output
What are the pros of BEA
Visual and easy to interpret
Provides guidelines
Scenario analysis – check profit under different situations
What are cons of BEA
Costs and prices change frequently
Costs and revenues are not usually straight lines
- TR: Ignores Law of Demand, price discrimination
- TC: Economies of scale
Ignores stock – i.e. not all output will be sold
What does a BEA look like?
Practice by drawing and completing question on haiku slides + case studies
