Chapter 11: Break-even Analysis Flashcards
How do we calculate contribution?
Selling price - Variable costs
How do we calculate the contribution sales (c/s) ratio?
Contribution / Selling Price
What is the break-even point?
Point at which a neither a profit nor a loss is made.
Total revenue will only cover the total costs.
Total contribution only just cover the total fixed costs.
How do we calculate the break-even point in units?
Total fixed costs / Contribution per unit
How do we calculate the break-even revenue?
Total fixed costs / C/S ratio
How to calculate the level of activity required to earn a target profit?
(Total fixed costs + Required profit) / Contribution per unit
How to calculate sales revenue required to earn a target profit?
(Total fixed costs + required profit) / C/S ratio
What is the margin of safety?
Point at which anticipated sales can fall below budget before a business makes a loss.
How to calculate margin of safety in units?
Total budgeted sales - break-even point sales
How to calculate margin of safety as a % of budgeted sales?
((Total budgeted sales - breakeven sales) / Total budgeted sales) x100
How to calculate the weighted average c/s ratio in multi-product contexts?
Total contribution for all products / Total revenue for all products
How to calculate breakeven revenue in multi-product contexts?
Fixed Costs / Weighted average C/S ratio
How to calculate weight average contribution per unit when sales volume is not provided?
(Product A contribution/unit x Product A’s sales mix %) + (Product B contribution/unit x Product B’s sales mix %)
What are the assumptions used in break-even analysis?
Linearity of total cost and total revenue
Constant Price
Constant variable cost per unit
Constant contribution
Constant fixed costs
All costs can be divided into fixed and variable elements
Efficiency and productivity are unchanged
The sales mix is maintained as total volume changes
