ACCT1022 Lecture Notes - Lecture 8: Sensitivity Analysis, Weighted Arithmetic Mean, Gross Margin
16 Feb 2017
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Document Summary
Decision making requires information on marginal costs. To identify marginal costs, you will need to understand how costs vary with the level of activity: fixed cost, variable cost, step variable cost, semi-variable cost. Many costs tend to be mixed: shipping charges on incoming orders for target, electricity, direct labor. Earnings = revenues total cost: revenue = price*quantity sold. Earnings = (p uvc)*q fc. What is the necessary condition to generate positive earnings: p uvc > 0, p uvc is often referred to as the unit contribution margin (ucm) Uvc but that is already accounted for in ucm. So the company should produce more units even though it is currently reporting losses. Break even units the number of units such that: earnings = 0, earnings = (p uvc)*q fc = 0, (p uvc)*q = fc. Q = fc/(p uvc) = fixed cost/unit contribution margin. Break even dollars are also referred to as break even sales.
