Cost behaviour and break-even analysis

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1. Contribution margin ratio =

  • contribution / cost of sales x 100%
  • contribution / fixed cost per unit x 100%
  • contribution / sales revenue x 100%
  • contribution / cost revenue x 100%
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2. Semi-Variable Cost or Semi-Fixed Cost

  • It is a mixture of fixed and variable cost
  • Remain constant (fixed) when changes occur to the volume of activity then changes
  • Vary according to the volume of activity

3. Margin of Safety in units of output

  • Planned Sales (units) / Break-even Point (units)
  • Planned Sales (units) – Break-even Point (units) x 100 / Planned Sales (units)
  • Planned Sales (units) – Break-even Point (units)
  • Planned Sales (units) + Break-even Point (units)

4. Weaknesses of break-even analysis:

  • Non-linear relationships, Stepped fixed costs, Multi-product businesses
  • Linear relationships, curved fixed costs, Multi-product businesses
  • Linear relationships, flat rate fixed costs, Multi-product businesses

5. Variable Cost

  • It is a mixture of fixed and variable cost
  • Vary according to the volume of activity
  • Remain constant (fixed) when changes occur to the volume of activity

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