What are the Nature Costs?

 Fixed Costs
 Variable
 Semi variable

What does the 'Target Profit' show?

Calculating the 'Target Profit' shows the
amount of output that needs to be sold in
order to give a certain amount of profit

What is the formula to show how many sales are required to reach the target profit?

 (fixed costs + target profit) / Contribution per unit

What are the 3 methods to calculate break even?

 Table Method
 Formula
 Graph Method

What does table method of calculating the breakeven point look like?

Breakeven_table_method.png (image/png)

What is the formula to work out the breakeven point?

 Selling Price (Per Unit)  Variable Costs (Per Unit) = Contribution per Unit
 Fixed Costs / Contribution per Unit = Breakeven point

What does Graph method of calculating the breakeven point look like?

Breakeven_graph_method.png (image/png)

What can breakeven be used interpret?

 The information provided
can help interpret what the
profit would be after selling
a certain amount of units.

What does the table to interpret what the profit would be after selling
a certain amount of units, look like?

Breakeven_graph_method.png (image/png)

What is the Margin of Safety?

 The amount by which sales exceed the breakeven point

What are the 3 formulas to calculate margin of safety?

 No. of units : Sales volume  breakeven point (units)
 Sales Revenue amount : Sales volume  breakeven
point (units) x Selling price
 Percentage : (current output  breakeven output) (100) /
Current output

What are the Advantages of breakeven analysis?

 Useful for a new business in order establish the level of sales that must be
achieved to reach breakeven point.

What are the Disadvantages/ Limitations of breakeven analysis?

 Difficult to make calculations for a mix of products, therefore it require separate calculations for every different type of product
 You can not forecast from the graph of what could be obtained by selling more units, therefore not allowing you to extrapolate the graph or calculations
 costs and revenue are expressed in terms of straight lines, however the relationship is not always so. Selling prices vary at different quantities sold; in similar way, variable costs alter at different levels as advantage is taken of the lower prices to be gained from bulk buying, and/or more efficient production methods

What are the Disadvantages/ Limitations of breakeven analysis?

 Relationship between sales revenue, variable costs and fixed costs remains the same at all levels of production. Only useful if the product is going sell in sufficient quantities
 Fixed costs do not remain fixed at all levels of output
 The profit or loss shown by the graph or calculations is probably only true for figures close to current output levels  the more that output changes from the current figures, the less accurate will be the expected profit or loss
 External factors not considered, such as economy, interest rates, the rate of inflation, etc
 No semivariables
 Based on estimates

When do you use Breakeven analysis?

 Before starting a new business
 When making changes within a business

Explain why you should use Breakeven analysis before starting a new business

 The calculation of breakeven point is important in order to see the level of sales needed by the business in order to cover costs, or to make particular levels of profit. The feasibility of achieving the level can be considered by the owner of the business, and other parties such as the bank manager.

Explain why you should use Breakeven analysis when making changes within a business

 The cost of a major change will need to be
considered by the owners and/or managers.
Eg. a large increase in production will. most
likely, affect the balance between fixed and
variable costs. Breakeven analysis will be
used as part of the planning process to
ensure that the business remains profitable.

Why is Breakeven analysis used?

 To measure profits and losses
 To answer 'what if?' questions
 To evaluate alternative viewpoints

Explain why you should use Breakeven analysis to measure profits and losses

 Within the limitations of breakeven analysis, profits and losses can be estimated at different levels of output from current production. (Remember that this can be done only where the new output is close to current levels and where there is no major change to the structure of costs  (ie. it is not possible to extrapolate)

Explain why you should use Breakeven analysis to answer 'what if?' questions

 Questions such as 'what if sales fall by 10%?' and 'what if fixed costs increase by £1,000?' can be answered  in part at least  by breakeven analysis. The effect on the profitability of the business can be seen, subject to the limitations. A question such as 'what if sales increase by 300 per cent?' is a fundamental change that it can only be answered by exclaiming the effect on the nature of the fixed and variable costs and then recalculating the breakeven point.

Explain why you should use Breakeven analysis to evaluate alternative viewpoints

 There are often different ways of production; this is particularly true of a manufacturing business. For example, a product could be made, either by a labour intense process, with a large number of employees supported by basic machinery, or buy using expensive machinery in an automated process with very few employees. In the first case, the cost structure will be high variable costs (labour) and low fixed costs (depreciation of machinery).

Explain why you should use Breakeven analysis to evaluate alternative viewpoints

 In the second, there will be low variable costs and high fixed costs. Breakeven analysis can be used to examine the relationship between the costs which are likely to show a low breakeven point in the first case, and a high breakeven point in the second. In this way, the management of the business is a guided by breakeven analysis; management will also need to know the likely sales figures, and the availability of money with which to buy the machinery.

What is the (Contribution sales/Profit Volume) ratio used for?

 If Fixed costs are known, we can use the CS ratio to find the sales value at which the business breakseven, or the sales value to give a target amount of profit

What does the (Contribution sales/Profit Volume) ratio show?

 Expresses the amount of contribution in relation to the amount of the selling price

How is the (Contribution sales/Profit Volume) ratio calculated?

 Calculated on the basis of a single unit of production or for the whole business

What is the formula used to calculate the (Contribution sales/Profit Volume) ratio?

 Contribution / Selling Price
