Lecture 12 Flashcards
(13 cards)
What is breakeven analysis?
To determine the sales volume needed to cover costs
Help assess economic feasibility and pricing decisions
Separate costs into = fixed costs and variable costs
Uses simple models to build intuition for business decisions
Definition of breakeven point
Number of units needed to cover all costs
Contribution definition
Price - variable cost: amount left to cover fixed costs
What’s the margin of safety?
How far actual/budgeted sales are above breakeven
What’s short-term marginal context?
It’s evaluates decisions based on contribution for example, should I take low priced order if it still contributes something? 
Break even formula
B = FC / (P-VC)
B = break even quantity
FC = fixed costs
VC = variable costs
P = price per unit
Margin of safety as a percentage 
Margin of safety (percentage) = ((actual - breakeven)/actual) x 100 
Margin of safety (units)
Actual sales - breakeven sales 
What does the contribution per unit represent?
The amount from each unit saleused to cover fixed costs 
Should a business except a sale below full price
Yes, if it still contributes positively in the short term
What limitation exists and breakeven analysis?
Assumes a linear costs and revenues – ignores stepped costs of variable shifts 
What is step fixed costs? 
Costs that increase in chunks after a certain output level, e.g. need for extra staff
What’s the economic meaning of marginal context?
Evaluating decisions based on their incremental impact, e.g. per unit gain 
