contribution and break-even analysis a2 accounting
TRANSCRIPT
![Page 1: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/1.jpg)
Contribution and Break-even Analysis
A2 Accounting
![Page 2: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/2.jpg)
Content
• Break even analysis• Break even analysis and decision making• Contribution • Special order decisions
![Page 3: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/3.jpg)
Break even
• Break even is the point of production where are firms revenue is equal to the total costs of production
• Margin of safety – the difference between the firms current level of output and break even output
![Page 4: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/4.jpg)
Uses of break even analysis
• Allows to decide if a business venture is financially viable
• Looks at what will happen if level of production changes
• To support an application for an external source of finance e.g. loan or mortgage application
![Page 5: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/5.jpg)
methods
1. Break even = Fixed costs / contribution per unit2. Graph 3. Table
![Page 6: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/6.jpg)
Using break even analysis
• Break even analysis can help managers to plan and in their operations
• In addition it can help:– Analyse the impact of a change in the environment on
the business– Decide whether or not to accept an order for products at
a different price from normal
![Page 7: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/7.jpg)
Changes in the business environment and Break even
• If VC rise in value then break even output increases• If VC fall in value break even output decreases• If FC rise break even output increases• If FC fall break even output falls• If selling price increases break even output
decreases• If selling price decreases break even output
increases
![Page 8: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/8.jpg)
Contribution
• Contribution • Contribution is the total revenue – variable costs• It measures how much is being contributed the
fixed costs by the units that have been sold • Contribution – Fixed costs = Profit • Can calculate contribution per unit or contribution
for all units of output
![Page 9: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/9.jpg)
Contribution costing and pricing
• Contribution costing:– Only looks at variable costs– Useful for large, multi site businesses as can see which functions
cover their variable costs• If a product failed to contribute fully to variable costs may
not withdraw it depending on:– Whether demand may increase in the future – If firms' can increase output of other products or not– If FC will decrease due to withdrawing the product– How the decision will affect the business as a whole
![Page 10: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/10.jpg)
Contribution Pricing
• Pricing decisions can use principals of contribution• If price exceeds variable cost then the business
knows the product is making a positive contribution• Its success is dependent on the firm selling their
output at the price chosen
![Page 11: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/11.jpg)
Special Order Decisions
• This is when businesses need to decide if to accept orders that are on special terms
• Prices lower than normal – if the contribution is positive generally accept the order
• However have to consider:– If more FC result from the order– May the order increase the level of VCs– If the company will resell the product– If it may lead to future sales – if this is the case may accept an
order that doesn’t make a positive contribution
![Page 12: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/12.jpg)
Special Order Decisions 2
• Prices higher than normal • Normally would accept this• However if specifications have to be altered it may
prove to be expensive for the business• The firm would need to:
– Calculate any extra variable costs associated with the order
– Assess if sufficient capacity to meet order– Decide if it increases contribution and profits
![Page 13: Contribution and Break-even Analysis A2 Accounting](https://reader036.vdocuments.us/reader036/viewer/2022082711/56649eff5503460f94c13f5e/html5/thumbnails/13.jpg)
Summary• Break even analysis looks at the output required for the firm to cover
all costs• Three methods of break even analysis – equation, chart, graph• Break even allows you to look at the impact of a change in the
business environment• Contribution – total revenue – variable costs• Firms can use contribution costing and pricing methods to attempt to
increase profitability • Special order decisions – look at how firms decide whether to accept
orders that are out of the ordinary, need to consider contribution and additional factors