l>Chapter 5 - Information for decision making

The "breakeven point" is where revenues and total costs are exactly the same, so there is no profit or loss. It may be expressed in terms of units of sale or in terms of sales revenue. Reading from the graph, the breakeven point is 3,000 units of sale and \$18,000 in sales revenue.The "margin of safety" is the amount which actual output/sales may fall short of the budget without a loss being made, often expressed as a percentage of the budgeted sales volume. It is a rough measure of the risk that Sabre Products might make a loss if it fails to achieve its budget. In our example, the margin of safety is calculated as follows:UnitsBudgeted sales3,600Breakeven point3,000Margin of safety (MOS)600As a percentage of budgeted sales; the= 16.67%.A high margin of safety shows a good expectation of profits, even if the budget is not achieved.The Profit/Volume (P/V) graphThe P/V graph is similar to the breakeven chart, and records the profit or loss at each level of sales, at a given sales price. It is a straight line graph, drawn by recording the following:i) the loss at zero sales, which is the full amount of fixed costsii) the profit/(loss) at the budgeted sales level.The two points are then joined up. In our example above, the PA/graph would look like this:Figure 5.2 The profit/volume (P/V) graph

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whether or not to cease production of Ducks.b) Suppose, however, it were possible to use the resources realised by stopping production of Ducks, and switch to produce a new item, Eagles, which would sell for \$50,000 and incur variable costs of \$30,000 and extra fixed costs of \$6,000. What will the new decision be?Key termsBreakeven analysisContribution/sales ratioCost-volume-profit analysisDecision makingMake or buy decisionsOpportunity costsProfit-volume chartsRelevant costsShutdown