Cost behaviour and break-even analysis

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  • Created by: josief95
  • Created on: 13-12-15 13:37

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

  • Historic cost (£10'000) + Engine cost (£2500) - Opportunity cost
  • Opportunity cost + Engine cost
  • Historic cost (£10'000) + Engine cost (£2500)
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2. Min. price for sale if product no longer used anyway?

  • Re-sale value £12
  • Replacement cost £14
  • Historic cost £/Unit £10

3. Fixed cost

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

4. Weaknesses of break-even analysis:

  • Non-linear relationships, Stepped fixed costs, Multi-product businesses
  • Linear relationships, curved fixed costs, Multi-product businesses
  • Linear relationships, flat rate fixed costs, Multi-product businesses

5. Semi-Variable Cost or Semi-Fixed Cost

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