Cost behaviour and break-even analysis

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1. Opportunity cost

  • Value of an opportunity a business will take
  • Value of an opportunity that has passed or been missed
  • Weighing up the value of each opportunity before decision is made
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2. 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)

3. 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)

4. Historic cost

  • Cost that has been impacted by inflation
  • Cost already incurred
  • Cost that has gone up since original price

5. Margin of Safety in percentage

  • Planned Sales (units) + Break-even Point (units) / Unplanned debt x100 - 5
  • Planned Sales (units) + Break-even Point (units) x 100 / Planned Sales (units)
  • Planned Sales (units) – Break-even Point (units) x 100 / Planned Sales (units)
  • Planned Sales (units) / Break-even Point (units) x100

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