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Dealing with Cost Accounting

You recently read a newspaper article about how the majority of businesses fail in their very first year. To minimize the possibility of this happening to you, you decide to use a breakeven analysis. You know it is a very useful and powerful tool not only for new businesses, but as an ongoing tool for the managers of a firm. At your next management meeting, discuss the following topics:

- At least 3 different applications of breakeven analysis
- The importance of only considering relevant versus irrelevant costs in analysis and decision making, using at least 1 example to demonstrate your point
- The challenge of, and how to handle, the mixed (i.e., semi-fixed or semi-variable) cost category.

Solution Preview

Breakeven is a point of no profit no loss. It is a useful tool of management accounting. It is calculated by following the formula:
Fixed costs/ Contribution Margin per unit.
Contribution margin is the direct margin of the business and fixed costs are the costs which don't change with the change in sales.
Application:
1) To understand the level of operations required to achieve profits.
2) To know about margin of safety. Margin of safety is positive if actual sales are greater than the break even. A higher margin ...

Solution Summary

Solution discusses the 3 different applications of breakeven analysis

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