108 business revenue & costs Flashcards
what is revenue
-all the money the business makes from sales
-selling price x quantity sold
what is costs
-all the money spent on starting up and running the business
-can be categorised as fixed, variable , semi variable , direct and indirect
what is profit
-the money the business has left over from revenue after all the costs have been paid for
-profit =total revenue - total costs
what are fixed costs/variable costs
-fixed-costs that do not change with output , they stay the same no matter how much is produced or sold eg.rent
-variable costs-costs that do change with output , these costs depend on how many items are produced/sold eg. raw materials
what are total costs/ semi variable costs
-total costs = fixed costs + variable costs (total variable costs = variable costs per unit x quantity made/sold)
-semi variable costs are costs that can be fixed or variable depending on the situation
what are direct/indirect costs
-direct-costs that arise specifically from the production of a product or the provision of a service eg.how much cloth has been bought to make each item of clothing a manufacturer makes
-indirect-costs not directly related to production eg.advertising costs
evaluate the impact of revenue , costs and profit on a business and its stakeholders (employees, customers , suppliers, shareholders)
customer: -by effectively controlling costs-keep products affordable,lots of profit -business can invest in research development and innovation proving better customer experiences eg,faster shipping
suppliers:-profitable business likely to pay suppliers well and on time-better relationship
employees:-high profit gives long term success to a business -provides job security,profitable businesses give higher wages
shareholders:-when business be rates revenue and earns a profit , it can distribute some if the profit to its shareholders (dividends), allowing shareholder to benefit financially from their investment into the company , when a company is profitable it attracts more investors , increase in demand for shares , resulting in capital gains for shareholders who choose to sell their shares
evaluate the impact of revenue , costs and profit on a business and its stakeholders (local community, mangers , government)
-local community:-when business generates revenue , business can contribute to the local community by taxes and jobs . the profit obtained with jobs can be used to spend on good and services-good for economy, and taxes help government it
-managers-when a business generates revenue,it provides managers with the resources needed to invest in growth including training employees, new technology ext. by controlling costs managers can decide budgeting , pricing strategies and resource allocation
-government:-tax from jobs , used to fund public services, infrastructure ext
what is contribution
contribution =selling price- variable cost per unit
-the amount of money left over can then be used to pay the fixed costs
what is breakeven
the point at which a business does not make a profit or a loss (where total sales=total revenue)
breakeven= fixed costs
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contribution per unit
how to construct a break even chart
1.plot fixed costs - horizontal line
2.plot variable costs line (variable cost x outputs)draw line from zero
3.plot sales revenue line (selling prices quantity sold) draw line from zero
4.plot total costs line(fixed costs+ variable costs) draw line from fixed costs line
5.breakeven point is where the total revenue line crosses total costs
what is margin of safety
-the actual number of units sold over and above the break even point
-margin of safety = actual sales- breakeven output
-it indicates the amount by which demand can fall before a business starts making losses-small margin puts business in danger if they experience a drop in sales
analysis how increasing price affects break even (what if analysis)
-impacts break even- reduces the break even point as each unit now has a bigger contribution-positive as the business now needs to sell less to break even-reducing risk
-HOWEVER, this depends on the elasticity of the product -if price is elastic and there are cheaper options , demand may fall -not helping the business break even
analysis how reducing costs by going to a cheaper supplier affects break even (what if analysis)
-the products may be bad quality-increasing break even point as each unit has a smaller contribution- negative as business needs to sell more to breakeven
-HOWEVER this depends on the quality offered, if worse , customers demand may fall as they seek better alternatives
analysis how reducing price affects break even (what if analysis)
-impacts break even as it will increase the break even point as each unit now has a smaller contribution , negative- needs to sell more to break even -increasing risk
-HOWEVER it depends on the elasticity of the product , if a price reduction leads to an increase in demand , then the business should break even easily
what is the usefulness of break even analysis to a business
(+) -allows new business to identity the exact amount required to survive
-it can help when seeking a loan as it shows likelihood of profit
-can be easy as it visually shows the business they may need to change price/reduce costs to help lower break even point
what does the usefulness of break even to a business depend on
(-) -assumes all goods produced are sold , and sold at the same price -business can have wastage through damaged stock , and sell it it a lower price
-assumes the relationship between costs and revenue is linear-costs can rise and fall at different levels of output
-assumes only one product is produced and sold
evaluate usefulness of break even to stakeholders (owners)
(+) can find breakeven a simple way of illustrating costs, revenue and profit and can help make the right decisions saving time and money, useful for borrowing investment
evaluate usefulness of break even to stakeholders (managers)
(+)useful for target setting, can use ‘what if analysis’ to model changes in costs/revenue on break even point-make decisions accordingly
(-) assumes one product is produced sold, at the same price
evaluate the usefulness of break even to stakeholders (employees)
don’t have a direct use of it, but they can see if the business is doing well, if not, then they don’t have job security- may start looking for other jobs
evaluate usefulness of break even to stakeholders (customers)
may not have any direct use of break even / would not have access to information-not useful
evaluate usefulness of break even to stakeholders (banks)
(+) useful in assessing business plans and to support application to finance, shows how profitable a business is and if they’re likely to be able pay the money back
(-) break even is one piece of information that contributes to decisions in banks
evaluate the usefulness of break even to stakeholders (suppliers)
have no direct use of using break even , but may be interested in knowing what quantity business need to produce and sell in order to cover costs . also may want information relating to break even in order to develop a relationship and make deals
evaluate the usefulness of break even to stakeholders (competitors)
(+) useful to know how well other business are doing and see what they need to change
(-) depends on being able to assess internal information and being able to rely on the credibility of the information
evaluate the usefulness of break even to stakeholders (government)
may not find break even directly useful -information is not used to calculate tax and not part of published accounts
