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Student lecture notes CHAPTER 21 BREAKEVEN ANALYSIS AND SHORT-TERM DECISION MAKING Fixed and variable costs A variable cost is one which ………………………….. with changes in the level of activity, over a defined period of time A fixed cost is one which is …………………………….. by changes in the level of activity, over a defined period of time Cost related to activity level The economist’s view Total cost varying with activity: the economist’s view Revenue and costs: the economist’s view The accountants view Variable cost Fixed cost Table of data showing variable and fixed costs Activity level 0 units 100 units 200 units 300 units ￡ ￡ ￡ ￡ Variable cost 0 10 20 30 Fixed cost 20 20 20 20 Total cost 20 30 40 50 Total cost  Total cost and total sales The breakeven point is that point of activity (measured as sales volume) where …………………………… and …………………….. are equal, so that there is …………………………………….. The margin of safety is the difference between the ……………………………… and the …………………………………….. (measured in units or in ￡s of sales). Breakeven chart Breakeven analysis Case study: Market trader A market trader rents a stall at a fixed price of ￡200 for a day and sells souvenirs. These cost the trader 50 pence each to buy and have a selling price of 90 pence each. How many souvenirs must be sold to break even? Algebraic method The equation for the breakeven point is: …………….. = ……………….costs + …………….. costs If the number of souvenirs sold at the breakeven point is n, then the total sales revenue is 0.9n and the total variable cost is 0.5n. ……… = ……… + …………….. ………. = ……….. Solving the equation, n = …………….. souvenirs to be sold to break even. Formula method Contribution per unit is the ………………………………… minus the …………………………………….. It measures the contribution made by each item of output to ……………………………….. and ………………………. of the organisation. Breakeven point = ……………….. ………………………………….. Co