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Emma Rudd




Finance and Accounts
Contribution and Break-Even Analysis ­ Text Book
Contribution
Contribution can be calculated using the following formula:
Contribution = Sales ­ Variable costs

It has two potential uses; first it is available to pay fixed costs incurred by a business.
Secondly, any contribution, which remains after…

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Emma Rudd




fuel costs and drivers wages are clearly variable. The existence of such semi-variable
costs makes it difficult to calculate contribution accurately.

Contribution Pricing
The concept of contribution is also useful when taking pricing decisions. If the manager
or owner of a business sets a price higher than the…

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Emma Rudd




at short notice it is likely that the supplier will face higher costs. This may make the
order unprofitable.

Once again contribution is key to the decision. If the selling price exceeds the variable
costs and no additional fixed costs are incurred, the order would be worthwhile and…

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Emma Rudd




Deciding whether to accept an order for products at prices different from those
normally charged.

In spite of its relatively simplicity break even provides managers with an effective and
clear method of analysis and can assist in making decisions such as setting prices or
accepting one off orders.…

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Emma Rudd




fewer sales will be
necessary to B/E

Fall in selling price Revenue line pivots B/E is reached at a Every sale will earn
downwards higher output the business less
revenue so, as costs
are unchanged more
sales are required
to B/E




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