Multi Product Analysis/CVP

What is breakeven analysis also known as?

Cost-Volume-Profit (CVP) analysis

What factors does breakeven analysis study?

Fixed costs, variable costs, sales price, quantity, and sales mix

How is the breakeven point in units calculated?

Breakeven point in units = Fixed costs / Contribution per unit

What is the formula for calculating the margin of safety?

Margin of safety = Budgeted level of activity - Breakeven level of activity

How is the contribution to sales ratio calculated?

Contribution to sales ratio = Contribution / Sales

What is the formula for breakeven revenue?

Breakeven revenue = Fixed costs / Weighted average C/S ratio

What does a weighted average C/S ratio indicate?

It shows what percentage each £ of sales revenue contributes towards fixed costs.

What is the significance of a constant sales mix in multi-product analysis?

It assumes that the relative proportion of each product's sale to total sales remains unchanged.

How is the breakeven revenue calculated using weighted average C/S ratio?

Breakeven revenue = Fixed costs / Weighted average C/S ratio

What is the margin of safety expressed as a percentage?

Margin of safety % = (Budgeted sales - Breakeven sales) / Budgeted sales x 100%

What is the breakeven in volume for a product mix of 2:1?

Breakeven in volume = Total fixed costs / Contribution of a set

How do you establish a target profit for multiple products?

Sales revenue required = (Total fixed costs + required profit) / Weighted average C/S ratio

What is the formula for calculating the required sales revenue to achieve a target profit?

Required sales revenue = (Total fixed costs + required profit) / Weighted average C/S ratio

What is the breakeven volume for a product mix of 3:1?

Breakeven volume = Breakeven revenue / Value of a set

What does the term 'contribution per unit' refer to?

The amount each unit contributes to covering fixed costs after variable costs are deducted.

What is the formula for calculating the level of activity needed to earn a required profit?

Level of activity = (Required profit + Fixed costs) / Contribution per unit

What is the impact of selling prices being unchanged in breakeven analysis?

It assumes that selling prices remain constant over the relevant volume range.

What is a limitation of breakeven analysis regarding cost behavior?

It assumes that total cost and total revenue behave linearly over the relevant range.

How is the contribution margin calculated?

Contribution margin = Sales revenue - Variable costs

What does a high margin of safety indicate?

It indicates a lower risk of incurring losses.

What does 'fixed costs remain constant' imply in CVP analysis?

It means fixed costs do not change with the level of production or sales.

What is the breakeven point in terms of sales revenue?

It is the sales revenue level at which total revenues equal total costs.

What is the formula for calculating the budgeted sales?

Budgeted sales = Quantity sold x Selling price per unit

What does the term 'sales mix' refer to?

The relative proportion of each product sold compared to total sales.

What is the contribution margin ratio?

Contribution margin ratio = Contribution margin / Sales revenue

How is the breakeven point expressed in terms of units?

It is the number of units that must be sold to cover all costs.

What does the term 'budgeted sales' mean?

The expected sales revenue based on planned sales volume and prices.

What are the assumptions of breakeven analysis?

Selling prices, prices of production factors, efficiency, and productivity are unchanged.

What is a limitation of breakeven analysis?

It assumes volume is the only relevant factor affecting costs, ignoring other influencing factors.

What does a cost card show?

The breakdown of the costs of producing output based on the classification of each cost.

What are the different remuneration methods?

Time-based systems, piecework systems, individual and group incentive schemes.

What is the definition of direct labour?

Basic pay of direct workers, including overtime when worked at a customer's request.

What is indirect labour?

Basic pay of indirect workers, such as maintenance staff, and includes overhead costs.

What is the formula for labour turnover?

Labour turnover = (Number of leavers requiring replacement / Average number of employees) x 100%

What does a labour efficiency ratio measure?

It compares the actual time taken to do a job with the expected or standard time.

What does the labour capacity ratio indicate?

It measures the percentage of total hours available for work that are actively spent working.

What is the formula for calculating labour efficiency?

Labour efficiency = (Standard hours for actual output / Actual hours worked) x 100%

What does a labour capacity ratio of less than 100% indicate?

It could indicate overstaffing and excess wage costs.

What are the components of indirect labour costs?

Overtime premiums, bonus payments, benefit contributions, idle time, sick pay.

What is the difference between direct and indirect costs?

Direct costs are directly tied to production, while indirect costs are overheads not directly linked to any specific product.

What is the significance of guaranteed minimum payment?

It ensures a minimum wage not determined by hours worked or units produced.

What is piecework payment?

Employees are paid per unit of output produced, a method of 'payment by results'.

What is the overtime premium?

A higher rate of pay for hours worked beyond normal hours, which can be direct or indirect costs.

What does a labour efficiency ratio greater than 100% indicate?

The workforce is performing faster than expected.

What is the impact of high labour turnover?

It can lead to loss of skills and increased costs for hiring and training new employees.

What is the role of incentive schemes in remuneration?

They reward individuals or groups for meeting or exceeding performance targets.

What is the formula for calculating actual hours worked?

Actual hours worked = Total hours worked by employees during a period.

What does the term 'idle time' refer to?

Time when workers are not actively engaged in productive work.

What is the purpose of calculating direct and indirect costs?

To accurately assess the total cost of production for financial analysis.

What is the significance of overtime worked at a customer's request?

The overtime premium is considered a direct cost that can be charged to the client.

What does a labour capacity ratio greater than 100% indicate?

Staff are working more hours than budgeted, potentially leading to overtime and stress.

What is the purpose of inventory control?

To manage the costs associated with inventory and ensure the right amount of stock is available.

What are the main types of inventory?

Raw materials, work-in-progress (WIP), finished goods, and supplies for daily operations.

What costs are associated with holding inventory?

Holding costs include opportunity cost, insurance, deterioration, obsolescence, and storage costs.

What is the formula for total annual holding cost?

Total annual holding cost = Ch x [(Q/2) + buffer].

What does 'Ch' represent in inventory cost calculations?

Ch represents holding costs per unit.

What is the formula for total annual ordering cost?

Total annual ordering cost = Co x (number of orders) D/Q.

What does 'Co' stand for in inventory management?

Co stands for ordering costs per order.

How is the total cost of inventory calculated?

Total cost = P + (Co x D/Q) + (Ch x Q/2), where P is the purchase price.

What is a stockout cost?

Costs incurred from not having enough inventory, including lost sales and reputation damage.

What is a re-order level?

The inventory level at which a new order must be placed to prevent stockouts.

How is the re-order level calculated?

Re-order level = (maximum usage x maximum lead time) + buffer.

What is Economic Order Quantity (EOQ)?

The optimal order quantity that minimizes total inventory costs.

What is the formula for calculating EOQ?

EOQ = sqrt((2 D Co) / Ch), where D is annual demand.

What is Economic Batch Quantity (EBQ)?

The optimal batch size for production that minimizes costs.

How do you calculate average holding costs?

Average holding costs are assumed as half of the average order size.

What is the significance of buffer inventory?

Buffer inventory acts as a safeguard against stockouts due to demand variability.

What is the impact of lead time on inventory management?

Longer lead times require higher re-order levels to prevent stockouts.

What are the consequences of stockouts?

Consequences include lost sales, production stoppages, and emergency orders.

What is the maximum usage in the context of re-order levels?

Maximum usage refers to the highest amount of inventory used during a specified time frame.

How does demand variability affect inventory management?

Higher variability increases the need for buffer inventory and careful re-order level calculations.

What is the formula for calculating re-order level using maximum daily demand?

Re-order level = (Maximum daily demand x maximum lead time) + buffer.

What factors should be considered when determining reorder levels?

Consider lead time, maximum usage, and buffer inventory needs.

What is the role of a cost card in inventory management?

A cost card shows the breakdown of costs associated with producing output.

What is the significance of calculating total costs in inventory management?

Calculating total costs helps businesses understand their financial commitments and optimize inventory levels.