Week 4 Flashcards
When looking at marginal costing what did we do?
We worked out total contribution by separating fixed and variable elements, then we took away fixed cost ( both manfuacturing and non manfuacturing)
What will we be looking at today?
Breakeven analysis
What is another name for breakeven analysis?
Cost volume profit analysis
What are the first 2 assumptions we make when doing CVP analysis?
1) Total costs are linear
2) Only one cost driver (e.g. labour hours, no. of units)
What is another assumption we make in CVP analysis?
Costs are defined as variable or fixed with respect to
a) a specific cost object
b) a defined time span
c) a particular ‘relevant range’ in the level of the cost driver
Would semi variable costs work in our assumptions, to do breakeven analysis?
No it would not, as they have fixed and variable elements to them( so we need a relevant image to do breakeven analysis)
What would be the relevant image for a semi variable cost?
What are stepped fixed costs?
This usually means a cost increases when the activity of a business exceeds a certain level, and the fixed cost then suddenly increases, but remains fixed at this new higher level.
When we have mixed costs which comprise of fixed and variable cost elements, we don’t always know how much they consist of so how do we do this?
Using the high low method ( the assumption is the cost has to be linear)
With the high low method, how would we find the variable cost per unit with a linear mixed cost?
It is the slope of the line so
Slope = Rise/run =y2-y1/x2-x1 = variable cost ( per unit of activity)
In otherwords
What is the variable cost per unit and total variable cost for march and december?
total variable cost = 3.18 x 850 for march
3.18 x 300 for december
How would we find our fixed costs?
Fixed cost = total cost - variable cost
FC = 4675 - 2704
=1971
So what does these numbers tells us about our mixed cost?
Our fixed cost element of our mixed cost is = 1971
Our variable cost for march and december are the same but number of units are different so
3.18 X 850 + 3.18 x 300 and add to the fixed cost to get $2704
You select the highests miles travelled and lowest
You select highest maintenance and lowest
find the change and find variable cost per mile
Fixed cost = total cost - variable cost
What is the break even point?
When profit is = 0
What is the difference between contribution and contribution per unit and total contribution
Contribution = total sales - total variable costs
Contribution per unit = selling price per unit - variable cost per unit
Total contribution = contribution per unit X number of units sold
What is the formula for Break even in units?
Contribution being either ( total contribution / no of units sold or selling price per unit - variable cost per unit.
What is breakeven in units for subs and what does this mean?
BE point in units = Fixed costs /contribution per unit ( selling price per unit- variable cost per unit.
What this is saying is that if we dont want to lose money, we have to sell at least 10000 subs at the price of $5 and variable cost of $3.
What is the forumla for breakeven to get a desired profit in units ?
How do we work out break even in sales?
BE IN Sales = FIXED COST / C/S RATIO
What does the contribution margin tell you?
you the aggregate amount of revenue available after variable costs to cover fixed expenses and provide profit to the company,”
Calculate BE in sales
Alternatively you could of done units to break even X selling price per unit to get $50000
so $50000 in sales providing we sell at $5 per unit and variable cost of $3 will allow us to break even and cover the fixed costs of $20000
What is the forumla for breakeven to get a desired profit in sales?
What does Margin of safety mean?
This is the amount sales can drop above break even point before we start incurring loses
What is the formula of margin of safety in units and in sales
Budgeted sales units - breakeven sales units
Margin of safety units X Selling price = MOS IN £s
How do we calculate Margin of safety in terms of a percentage?
Margin of safety % = (MoS units/Budgeted Sales units) x 100%
What is Mos in units and Mos as percentage and what does this mean
Margin of safety in units = budgeted sales units - breakeven sales units = 50000
50000/250000 = 20%
This means our forcasted budgeted sales can fall 20% before we start losing any money
Work out units required to BE FOR A DESIRED PROFIT and sales required to breakeven for a desired profit.
Contribution per unit = selling price per unit - variable cost per unit
35-20 = £15
BE in sales units = Fixed costs+ Desired profit / Contribution/unit
45000+30000 /15 =5000 units to BE
5000 x 35 = 175000 are the sales required to break even keeping the selling price and variable cost the same.
Or SALES IN £ = FC + Desired profit / C/S ratio ( contirbution/unit / selling price/ unit)
75000/(3/7)
=175000
Show profit on an income statement
Sales less Variable Costs = Contribution
Contribution Less Fixed Costs = Profit
Continuing from previous example (S.P £35): • Peacock Ltd. is considering automating part of its production process, which it is envisaged will result in variable costs falling to £15 per unit, but fixed costs will increase to £67,500 per annum due to increased hire charges and machine servicing costs. 1. How many units must be sold to maintain the profit level of £30,000? What does this show?
Contribution margin = selling price per unit - variable cost per unit = 35-15 = £20
Fixed costs are £67500
Desired profit level is £30000
Be in Units = Fixed costs+ Desired profit level/ contribution per unit
£67500 + £30000 /20 = 4875 units
This shows that the decision to automate is the correct one, because profit of £30,000 requires 125 less units to sell