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FINANCE & ACCOUNTS (3.3 Break-even analysis (Calculation methods…
FINANCE & ACCOUNTS
3.2 Costs & Revenues
Types of costs
direct
indirect/overhead
fixed
variable
semi-variable
Revenue
Total Revenue
total income from sales of all unit of product =
Quantity x Price
Revenue Stream
the income that organization gets from a particular activity
3.3 Break-even analysis
:!: total costs = total revenue
Calculation methods
table of costs and revenues
graphical
break-even chart
margin of safety
formula
total contribution
unit contribution x output
contribution per unit
selling price - direct costs per unit
break-even level of output =
fixed costs / contribution per unit
Further Uses
calculating output to achieve target profit
calculating target break-even revenue
calculating target price
Evaluation
Advantages
easy construction of charts
provides useful guidelines
able to compare
equation produces precise results
Disadvantages
unrealistic assumption
inconvenient for some costs
no allowance made for stock levels
actual data might vary
3.5 Profitability & Liquidity Ratio Analysis
Profitability Ratios
Profit margin ratios
gross profit margin
net profit margin
strategies to improve
reducing direct costs - cutting the costs of goods sold
increasing price
reducing overhead costs
Return on Capital employed (ROCE)
assess the profitability of a business
strategies to increase ROCE
increase net profit w/o increasing capital employed
reduce capital employed
Liquidity Ratios
current ratio
acid test ratio
strategies for increase
sell off fixed assets for cash
sell off inventories for cash
increase loans to inject cash