1.3.2 Business Revenues, Costs and Profits

Question 1

Revenue (sales revenue, sales turnover):

Answer 1

amount of income received from selling goods or services over a period of time

Question 2

How do you calculate revenue?

Answer 2

revenue = price x quantity sold

Question 3

Costs:

Answer 3

what the business pays to provide the good or service

Question 4

Variable costs:

Answer 4

costs which change as a result of changes in output/sales (e.g. raw materials, packaging) by a business

Question 5

Fixed costs:

Answer 5

costs which don’t change in relation to output/sales of the business

Question 6

How do you calculate total cost/cost of sales?

Answer 6

total cost/cost of sales = total variable costs + total fixed costs

Question 7

Can fixed costs be avoided?

Answer 7

• fixed costs can’t be avoided if business is to be available to customers
  
  • fixed costs can change but won’t change relative to the business’s output

Question 8

Profit:

Answer 8

the moment a product is sold for more than it cost to produce, then a profit is earned

Question 9

How do you calculate profit?

Answer 9

profit = total revenue - total costs

Question 10

How do you calculate gross profit?

Answer 10

gross profit = revenue (turnover) - total costs (cost of sales)

Question 11

How do you calculate net profit (operating profit)?

Answer 11

net profit (operating profit) = gross profit - fixed costs (expenses)

Question 12

Breakeven:

Answer 12

• shows how many units a firm needs to produce and sell in order to cover its total costs
• point at which TR = TC and therefore no profit or loss is made
• total revenue = total costs

Question 13

Why is breakeven useful?

Answer 13

• to identify output level needed - can act as a target
• to assess impact of change on breakeven point
• to support an application for a loan/investors

Question 14

How is the contribution per unit calculated?

Answer 14

contribution per unit = sales price per unit - variable cost per unit

Question 15

How do you calculate the margin of safety?

Answer 15

margin of safety = (actual/budgeted sales/output - breakeven sales/output)/current sales x100

Question 16

What effect does a higher selling price have on the contribution per unit?

Answer 16

higher

Question 17

What effect does a higher selling price have on the breakeven point?

Answer 17

lower

Question 18

What effect does a lower selling price have on contribution per unit?

Answer 18

Lower

Question 19

What effect does a lower selling price have on the breakeven point?

Answer 19

higher

Question 20

What effect does a higher variable cost per unit have on the contribution per unit?

Answer 20

Lower

Question 21

What effect does a higher variable cost per unit have on the breakeven point?

Answer 21

Higher

Question 22

What effect does a lower variable cost per unit have on the contribution per unit?

Answer 22

Higher

Question 23

What effect does a lower variable cost per unit have on the breakeven output?

Answer 23

Lower

Question 24

What effect does an increase in fixed costs have on the contribution per unit?

Answer 24

No change

Question 25

What effect does increase in fixed costs have on the breakeven output?

Answer 25

Higher

Question 26

What effect does decrease in fixed costs have on the contribution per unit?

Answer 26

No change

Question 27

What effect does decrease in fixed costs have on the breakeven output?

Answer 27

Lower

Question 28

Strengths of break-even analysis:

Answer 28

• focuses on how long it will take before a start-up reaches profitability
• helps entrepreneur and finance providers to better understand the viability and risk factors
• margin of safety shows how much a sales forecast can prove over optimistic before losses are incurred
• illustrates the importance of keeping fixed costs down to a minimum
• calculations are quick and easy

Question 29

Limitations of break-even analysis:

Answer 29

• unrealistic assumptions - products not all sold for same selling price at different levels of output changes
• sales unlikely to be same as output - may be some build-up of stocks or wasted output too
• variable costs per unit don’t always stay the same e.g. as output rises, business may benefit from being able to buy inputs at a lower prices (buying power)
• most businesses sell more than 1 product
• planning aid rather than a decision making tool

Question 30

How to reduce breakeven output:

Answer 30

• maximise added value per unit sold: aim to maximise selling price
• negotiate to reduce cost of raw materials and other inputs (=lower variable cost)
• keep overheads or fixed costs under control
• increase price of product/service - may reduce breakeven point but may also deter customers from buying

Question 31

How do you calculate breakeven point in units?

Answer 31

BE = fixed costs/unit contribution

Question 32

Breakeven table example:

Answer 32

Question 33

Breakeven graph example:

Answer 33

Question 34

What does profit allow a business to do?

Answer 34

• survive
• reinvest profits for expansion
• providing security and savings
• reward employees
• generate wealth for the owner

Question 35

How do you calculate interest on loans?

Answer 35

interest (on loans) % = (total repayment - borrowed amount)/borrowed amounts x 100

Question 36

What is interest when saving and borrowing money?

Answer 36

• Saving £ - interest is the % reward for saving
• Borrowing £ - interest is the % cost of borrowing

Question 37

Margin of safety:

Answer 37

• the amount of output between the actual level of output where profit is being made and the break even level of output
• this is how much the production could fall before the business starts to make a loss

Question 38

How do you calculate the breakeven point in revenue / costs?

Answer 38

Breakeven point in revenue / costs = breakeven point in units x sales

Question 39

How do total costs change as a business grows?

Answer 39

• key benefit of business growth is economies of scale
• a business’ costs will still increase as it grows, but the cost per unit will decrease
• as these are different forms of economies of scale but the most well known is purchasing economies of scale where businesses receive discounts for bulk buying from suppliers