Cost behaviour and break-even analysis

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1. Margin of Safety:

  • It is the excess of planned volume (sales revenue) of activity over volume (sale revenue) at Break-even Point
  • It is the excess of planned volume (equity) of activity over volume (Capital) at Break-even Point
  • It is the excess of planned volume (equity) of activity compared to the depreciation of (Capital) at Break-even Point
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2. Minimum price a business should charge for a lorry (£10,000) fitted with new engine (£2500) which could be sold immediately for (£9,000)

  • Historic cost (£10'000) + Engine cost (£2500) - Opportunity cost
  • Opportunity cost + Engine cost
  • Historic cost (£10'000) + Engine cost (£2500)

3. Contribution margin ratio =

  • contribution / cost of sales x 100%
  • contribution / sales revenue x 100%
  • contribution / cost revenue x 100%
  • contribution / fixed cost per unit x 100%

4. Fixed cost

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

5. Relevant cost examples:

  • Opportunity cost & Differential future cost
  • Differential future cost
  • Opportunity cost & Historic cost
  • Differential future cost & Historic cost

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