A&F week 7

weaknesses of break-even analysis

1. Selling price is constant. 2. Costs are linear and can be accurately divided into variable and fixed elements. 3. It is assumed that everything the company produces is sold in the same period.

margin of safety equation

= budgeted or actual sales - break even point

target sales equation

= fixed costs + target profit / unit contribution margin

break-even volume (in units) equation

= fixed costs / contribution margin per unit

profit/ loss equation

= sales above or below BEP x contribution margin per unit

contribution margin equation

= sales revenue per unit - variable costs per unit

Darwin Inc. sells a particular textbook for $20. Variable costs are $14 per book. At the current volume of 50,000 books sold per year the company is just breaking even. Given these data, the annual fixed costs associated with the textbook total: a) $300,000 b) $1,000,000 c) $1,300,000 d) $700,000

a. $300,000

Which one of the following best describes a fixed cost? a) One that is unaffected by the level of activity (output) b) One that is unaffected by time c) One that involves a long-term commitment by the business d) One that is unaffected by the level of inflation

a. one that is unaffected by the level of activity

Which ONE of the following is most likely to be a semi-variable (semi-fixed) cost for a publishing business? a) Telephone charges for land lines b) Rent payable for offices c) Salaries for administration staff d) Royalties payable to authors

a. telephone charges for land lines

A business produces a product that is sold for £10 each. Variable costs are £4 for each product and total fixed costs are £2,400. During the year, the business sold 600 units of the product. What is the 'margin of safety'? a) 400 units b) 200 units c) 360 units d) 240 units

b. 200 units

Which ONE of the following would be a fixed cost of a manufacturer of filing cabinets? a) Electricity consumed by production equipment b) The rent of the factory c) The cost of plastic packaging to wrap the finished product d) The cost of metal needed to manufacture the filing cabinets

b. the rent of the factory

Which one of the following is the correct description of the break-even point? a) Where total revenue equals total variable costs b) Where total revenue equals total fixed and variable costs c) Where total revenue equals total fixed costs d) Where total revenue equals total contribution

b. where total revenue equals total fixed and variable costs

Lazy Jane Ltd produces a single product that sells for £100 Variable costs per unit are £40 The company expects that total fixed costs will be £30,000 for the next month at the projected sales level of 1,000 units. What is the break-even point in terms of number of units? a) 400 units. b) 450 units. c) 500 units. d) 600 units.

c. 500 units

Which one of the following best describes a variable cost? a) One that does not change proportionately with the level of activity (output) b) One that is affected by the time period c) One that is constant per unit of output, irrespective of the level of output d) One that is affected by the general level of inflation

c. one that is constant per unit of output, irrespective of the level of output

The breakeven point can be defined as: a) The level of activity where cash flow is zero b) The level of activity where profits equal fixed costs c) The level of activity at which there is neither a profit nor a loss d) The level of activity where variable costs are covered by sales revenue

c. the level of activity at which there is neither a profit nor a loss

variable costs

costs which vary to the volume of activity

Barker Ltd makes a single product that is sold for £45 each. Fixed costs are £100,000 and variable costs per unit are £20. The company has made heavy losses in recent years but is slowly reducing the scale of these losses. For the forthcoming year, the target loss is £10,000. How many units must be produced to achieve this target? a) 4,500 b) 4,000 c) 4,400 d) 3,600

d) 3,600 (£100,000 - £10,000) ÷ £25 per unit

Which one of the following is the formula for calculating contribution per unit? a) Variable costs per unit plus fixed costs per unit b) Profit per unit plus variable costs per unit c) Sales revenue per unit less fixed costs per unit d) Sales revenue per unit less variable costs per unit

d. sales revenue per unit less variable costs per unit

Which one of the following best describes the margin of safety? a) The formula [Fixed costs/(Sales revenue per unit - Variable costs per unit)] b) The extent to which the total sales exceeds the total variable costs c) The extent to which the total sales exceeds the total fixed and variable costs d) The extent to which the planned volume of sales lies above the break-even point

d. the extent to which the planned volume of sales lies above the break-even point

On a cost-volume-profit graph, the break-even point is located: a) at the origin. b) where the total revenue line intersects the volume axis. c) where the total costs line intersects the pounds axis. d) where the total revenue line intersects the total costs line.

d. where the total revenue line intersects the total costs line

Ashford Company manufactures a single product that sells for £20 per unit. Variable costs are £15 per unit. Annual fixed costs are estimated to be £60,000. What is the contribution margin per unit? a) £40 b) £20 c) £15 d) £ 5

d. £ 5

three main cost types

fixed, variable, mixed

mixed costs

includes both a fixed element that is fixed whatever the level of activity & a variable component that is directly related to the level of activity

fixed costs

one which is not affected by changes in the level of activity, for a specified period of time

the break-even point can be defined as...

the volume of sales at which a business makes neither a profit nor loss.

break-even analysis is when...

total sales revenue = total costs