Chapter 10 - break even analysis.

Question 1

1. What is a ‘break even anaylsis’ / ‘cost-volume profit’?
2. What is the break even point and how is it calculated?

Answer 1

1. The study of the relationship betwen cost and profit at various activity levels.
   2.

Question 2

1. What is a contibution ratio?
2. What is the formula to calculate it?
3. How is the BEP calculated in terms of sales revenue?

Answer 2

1. A measure of how much contribution is earned from each £1 of sales
2. Total contribution / Total revenue _{<em>(or calculated per unit)</em>}
3. Fixed costs / contribution ratio

Question 3

Answer 3

Marginal structure can be used to calculate how much contribution is made per unit.

Question 4

1. What is the margin of safety?
2. How is this calculated in term of units and as a % of budgeted sales.

Answer 4

The amount by which sales can fall bellow the expected amount without a loss being incurred.

Question 5

What is the formula to calculate how many units need to be sold to achieve a certain level of profit?

Answer 5

Sales volume for target proft = (Fixed costs + target profit) / Contribution per unit.

Question 6

BEP or profit target may change if there is a change in selling price, variable costs or fixed costs.

Answer the following…

Answer 6

Question 7

Show a traditional breakeven chart…

• Label the BEP and margin of safety

Answer 7

Question 8

Show a traditional breakeven chart…

• Label the BEP and margin of safety

Answer 8

Question 9

What are the limitations of a break even analysis?

Answer 9

• It can be time conduing to produce charts
• It ignores uncertaincies in estimates of sale prices and fixed / variable costs.
• It assumes thatunits produced quals units sold (inventory levels are ignored)

Question 10

1. What is a limiting factor analysis / key factor analysis?
2. By what 4 steps is this calculated?

Answer 10

1. Identiying the factor that limits sales in order to produce an optimal production plan → what products to produce the most of to maximise profit.
   2.

Question 11

Answer 11

Question 12

What are buy or make decision?

Answer 12

If demand exceeds production capacity and firm needs to decide…

• Whether to buy in resources from external suppliers
• Which products to manafacture itself and which to subcontact out

Question 13

With what 4 steps are buy or make decisions made?

Answer 13

Question 14

Answer 14