Break-Even Analysis and Cost Management

This set of flashcards covers the key topics discussed in the lecture notes, focusing on break-even analysis, cost-revenue relationships, and decision-making in business.

Why did many businesses in South Africa relocate?

More than half of owners or occupiers of commercial property in South Africa relocated to achieve a lower break-even output, helping them cover costs with a lower level of output during economic uncertainty.

Besides achieving a lower break-even quantity, what are other reasons why businesses relocate?

To improve market positioning and to increase capacity and total profit in the long term.

What are the three methods for undertaking a break-even analysis?

The table of costs and revenues method, the graphical method (break-even chart), and the formula method.

What is the break-even point?

The point at which total costs equal total revenue, resulting in zero profit or loss.

Describe the variable costs line in a break-even chart.

It starts from the origin (0), increases at a constant rate, and shows total variable costs = quantity x variable cost per unit.

How is the total costs line obtained in a break-even chart?

It starts at the level of fixed costs and follows the same slope/gradient as variable costs.

What is margin of safety?

Margin of safety is the amount by which the current output level exceeds the break-even level of output.

What is the formula for calculating the break-even level of output?

Fixed costs / Contribution per unit

What is the formula for calculating the target profit level of output?

Fixed costs + Target profit / Contribution per unit

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

Fixed costs + Target profit / 1 - (direct cost/price)

What is the formula foe calculating the break-even target price?

(Fixed Costs / Production level) + Direct Cost

What are the benefits of break-even analysis?

Charts are easy to construct and interpret, provide guidelines on break-even points and safety margins, and allow comparisons by showing changed circumstances.

What is contribution per unit?

Selling price of a product minus direct costs per unit.

What are examples of what would happen to a firm if they achieve break even at 5500 units (packs) per month?

The price of sugar per kilo rises, the business relocates to other premises where the rent is lower or the business buys technologically advanced energy-saving machines, which produce items faster.