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CIPS L4M5 Exam - Topic 6 Question 70 Discussion
Topic #: 6
Which of the following are most likely to turn buying organisation into an unattractive customer in supplier's perspective? Select TWO that apply.
The analysis of cost into fixed and variable enables organisations to determine their break-even point (BE) - the point where total revenue from sales and total cost exactly balance. All costs need to be covered by sale revenue in order for a company to make a profit. If you know your fixed costs and your variable costs then you can work out the minimum quantity of goods or services you need to sell to break even. Break even point is measured in volume and can be worked out graphically or via formulae:
Price - Variable costs = Contribution
Break even point (volume) = Fixed expenses/Contribution margin per unit
In this scenario, the break even point (Q) is: 270,000/(180-126) = 5,000
To make a profit, the supplier needs to sell more than 5,000 units per month.
The BE point is thus an important determinant of flexibility of pricing for suppliers. Before BE is achieved there will be much greater reluctance to offer price concessions to customers than after BE is achieved.
LO 2, AC 2.1
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