What is the break even analysis also known as?
Cost-volume-profiit analysis (CVP analysis)
What is break even analysis?
Study of the effects on future profit of changes in fixed cost, variable cost, sales price, quantity and mix.
What does break even analysis do?
Considers the impact on the budgeted profit of changes in these various factors.
What is the break even point?
Level of activity at which there is neither profit, nor loss.
What is the formula for working out break even points in units?
Fixed costs/contribution per unit
How do you work out the level of activity for a required profit?
Required profit + fixed costs / contribution per unit
What is the margin of safety?
The margin of safety is the difference between the budgeted level of activity and the break-even level of activity. It may be expressed in terms of units, sales value or as a percentage of the original budget.
What does the contribution sales ratio reveal?
The C/S ratio reveals the amount of contribution that is earned for every £1 worth of sales revenue.
How is the C/S ratio normally shown?
As a percentage
What is the C/S ratio?
How do you work out the break even point in terms of sales revenue?
Fixed costs/C/S ratio
How do you work out the sales revenue to earn a required profit?
Required profit + fixed costs / C/S ratio
How do you work out the margin of safety as a percentage?
Budgeted sales - breakeven sales / budgeted sales
What is the main advantage of profit-volume chart?
It is capable of depicting clearly the effect on profit and breakeven point of any changes in the variables.
What does CVP assume if a range of products is sold?
Sales will be in accordance with a pre-determined sales mix.
What is the assumption of relative proportion of each products sales to total sales?
The assumption has to be made that the sales mix remains constant.
How can the relative proportion of each product’s sale to total sales be expressed?
As a ratio or a percentage
What is the weighted average c/s ratio?
Total contribution/Total revenue
When is the weighted average c/s ratio used?
In multi-product situations
How do you work out the break even in sales revenue?
Fixed costs/Weighted average C/S ratio
How do you work out the target profit for multiple products?
Fixed costs + required profit /Weighted average C/S ratio
What two lines must be shown on the multi-product profit-volume graph?
- One straight line where a constant mix between the products is assumed
- One bow shaped line, to see how the individual products contribute to profit rather than as a constant mix.
With a multi-product profit-volume graph, what is is assumed for the bow shaped line?
It is assumed that the company sells its most profitable product first and then its next most profitable product, and so on.
What are some underlying assumptions that will he precision and reliability of a given cost-volume-profit analysis. (11)
- The behaviour of total cost and total revenue has been reliably determined and is linear over the relevant range.
- All costs can be divided into fixed and variable elements.
- Total fixed costs remain constant over the relevant volume range of the CVP analysis.
- Total variable costs are directly proportional to volume over the relevant range.
- Selling prices are to be unchanged.
- Prices of the factors of production are to be unchanged (for example, material, prices, wage rates).
- Efficiency and productivity are to be unchanged.
- The analysis either covers a single product or assumes that a given sales mix will be maintained as total volume changes.
- Revenue and costs are being compared on a single activity basis (for example, units produced and sold or sales value of production).
- Perhaps the most basic assumption of all is that volume is the only relevant factor affecting cost. Of course, other factors also affect costs and sales. Ordinary cost-volume-profit analysis is a crude oversimplification when these factors are unjustifiably ignored.
- The volume of production equals the volume of sales, or changes in beginning and ending inventory levels are insignificant in amount