Cost behaviour and break-even analysis

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1. Irrelevant cost examples:

  • Sunk / Expired / Historic cost; a cost that will be avoided by the company
  • Sunk / Expired / Historic cost; a cost that doesn't require the decision of management
  • Sunk / Expired / Historic cost; a cost that will not impact the company
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2. Break-even point (BEP):

  • Variable Cost / Contribution per unit (Contribution per unit = Variable costs per unit + Sales revenue per unit)
  • Fixed cost / Contribution per unit (Contribution per unit = Sales revenue per unit − Variable costs per unit)
  • Fixed cost / Contribution per unit (Contribution per unit = Variable costs per unit + Sales revenue per unit)

3. Semi-Variable Cost or Semi-Fixed Cost

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

4. Minimum price a business should charge for a lorry (£10,000) fitted with new engine (£2500) which could be sold immediately for (£9,000)

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

5. BEP = [Total sales revenue =

  • Total cost]
  • Total cost - Variable cost]
  • Total cost + Variable cost]
  • Total cost - Fixed cost]

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