Accounting for Managers: Interpreting accounting information for decision-making

114 ACCOUNTING FOR MANAGERS

£’000

Revenue 17,000 @ £30 510

3,000 @ £12 36

546

Variable costs 20,000 @ £10 200

Contribution 346

Fixed costs 200

Net profit 146

Consequently, provided that the business can sell at a price that at least covers
variable costs, in the short term the business will be better off. This argument does
not follow through into the long term, over which the business must cover all its
costs in order to be profitable. However, a business will also minimize its losses
by selling at a price that covers variable costs but not full costs. If in the above
example volume falls below the breakeven point:

£’000

Revenue 8,000 @ £30 240

Variable costs 8,000 @ £10 80

Contribution 160

Fixed costs 200

Net loss 40

If an order of 3,000 units at £12 is accepted, the loss will be reduced by £6,000:

£’000

Revenue 8,000 @ £30 240

3,000 @ £12 36

276

Variable costs 11,000 @ £10 110

Contribution 166

Fixed costs 200

Net loss 34

However, consideration needs to be given to the long-term marketing implications
of accepting orders at less than normal selling price: