MAPS - Chapter 8 - Short-term Decisions Flashcards
What is meant by a short-term decision?
Actions that impact cost now more then a year into the future
How do you work out contribution per unit?
Selling price per unit less variable cost per unit
What can break-even also be referred to as?
CVP (cost, volume, profit) analysis
What is the break-even point?
The point at which neither a profit nor a loss is made
How do you work out break even
Fixed Costs / (Selling price - variable cost)
What methods can be used to solve break-even points?
- Calculation method
- Table method
- Graph method
What is the margin of safety?
The amount by which sales exceed the break-even point
How do you work out margin of safety as a percentage?
((Current output - break-even output) / current output ) x 100
How do you work out number of units for target profit?
(Fixed costs + target profit) / Contribution per unit
What else is the profit-volume ratio (PV) known as?
Contribution sales ratio (CS)
What is the profit volume ratio?
Contribution / Selling price
What can the PV ratio tell us?
If fixed costs are know we can figure out the sales revenue needed to break even. Can also find the sales revenue to give a target profit
How can you use the PV ratio to find required level of sales for target profit?
(Fixed costs + Target profit) / PV ratio
When is break-even analysis used?
- Before starting a new business
- When making changes
- To measure profits and losses
- To answer ‘What if?’ questions
- To evaluate alternative view points
What is special order pricing?
When a business uses spare capacity to make extra sales of its products at a lower price than normal
