unit 5 operations Flashcards
break-even point
the level of output at which total costs equal total revenue
total revenue formula
price x quantity
total cost formula
fixed costs + (variable costs per unit x quantity)
break event point formula
total revenue=total costs
profit or loss formula
total revenue - total costs
margin of safety formula
level of demand - break-even quantity
target profit quantity formula
(fixed costs + target profit)/(price - variable costs)
contribution per unit formula
selling price of a product - direct costs per unit
total contribution formula
unit contribution x output
contribution
refers to the sum of money that remains after all direct and variable costs have been taken away from sales revenue
i.e. how many units of output have to be sold in order to pay for fixed costs?
unit contribution
the proportion of the selling price per unit that contributes to paying off fixed costs
total contribution
quantity of output needed to contribute to paying off total fixed costs
break-even level of output
fixed costs/unit contribution
margin of safety
the amount by which the current level of output exceeds the break-even level of output
limitations of break-even analysis as a decision tool
- assumptions: assumes that all output will be sold, that all cost functions are linear, sales revenue function is linear
- not useful to a dynamic business due to its static nature
- ignores external quantitative and qualitative factors
- only suitable for single product firms
