1.6 Revenue, costs, profits and cash

Question 1

Sales revenue calculation

Answer 1

Price * Quantity sold
Price * Sales volume

Question 2

Average cost calculation

Answer 2

Total cost / Quantity sold

Question 3

Sales volume

Answer 3

Number of items sold over a period of time

Question 4

Sales revenue

Answer 4

The value of sales of a business

Question 5

Total revenue calculation

Answer 5

Price * Quantity

Question 6

Profit calculation

Answer 6

Total revenue - total costs

Question 7

Total cost calculation

Answer 7

Total fixed costs + Total variable costs

Question 8

Total fixed costs

Answer 8

Do not change with output
rent, loan repayments`

Question 9

Total variable costs

Answer 9

Do change with output
raw material costs, energy bills, packaging

Question 10

Average costs calculation

Answer 10

Total costs / output

Question 11

Average fixed cost calculation

Answer 11

Total fixed costs / output

Question 12

Average variable cost calculation

Answer 12

Total variable cost / output

Question 13

Percentage change calculation

Answer 13

((Q2 - Q1) / Q1)*100

Question 14

Contribution

Answer 14

The difference between the price of a product and its variable costs

Question 15

Break-even point

Answer 15

Level of output at which the total revenue is exactly the same as the total costs
Neither profit nor loss being made

Question 16

Break even point calculation

Answer 16

Total fixed costs / (price - average variable cost)

Question 17

Margin of safety

Answer 17

Difference between actual level of output and break even level of output

Question 18

Break - even analysis

Answer 18

Looking at break-even point and deciding if business venture will be feasible

Question 19

Strengths of break-even analysis

Answer 19

Helps to assess strength of business idea and whether it is worthwhile or not
Helps to assess levels of output that need to be reached to make profit
Shows impact of changes in price and/or costs on BEP and any profit levels
Enables calculation of profit/loss over diff levels of output
Helps support application for finance

Question 20

Weaknesses of break - even analysis

Answer 20

Assumes costs rise steadily - may not: bulk buying can reduce cost per unit
Assumes all output is sold
Only a forecast and estimates of costs and price levels may be unrealistic
Knowing BEP does not mean that you will acc sell that amount
Markets are dynamic so constant changes can affect BEP

Question 21

Gross profit calculation

Answer 21

Turnover - Variable costs

Question 22

Gross profit limitation

Answer 22

Does not take into account fixed costs

Question 23

Operating profit calculations

Answer 23

Turnover - (Fixed+Variable Costs)
Gross profit - fixed costs

Question 24

Operating profit

Answer 24

Key indicator of business performance

Question 25

Net profit calculations

Answer 25

Turnover - Total costs - Taxes - Interest
Operating profit - Taxes - Interest

Question 26

Statement of comprehensive income

Answer 26

Shows a company’s net profit or loss over a given time period
Details all revenues and costs of business

Question 27

Profit margin

Answer 27

Tells business just what percentage of its turnover is actually profit

Question 28

Gross profit margin

Answer 28

Shows how efficiently the business is using its main inputs to the production process

Question 29

Operating profit margin

Answer 29

Highlights the efficiency of the business as a whole

Question 30

Increasing profit

Answer 30

Adding value
Improving reliability
Repositioning market
Market research
Promotion
Cutting costs

Question 31

Cash

Answer 31

Money available to the business to cover costs
Crucial to cash flow and working capital management

Question 32

Cash flow forecast

Answer 32

A statement over time of the cash entering a business from its sales and the cash leaving a business ro payf or its costs

Question 33

Importance of cash flow forecast

Answer 33

Every business needs available cash on a day to day basis
Cash flow is the flow of money in and out of a business
When a business sells it products, money flows in
When it buys raw materials, money flows out
Cash inflow often lags behind cash outflow
Cash dries up and creditors and bille need to be paid.

Helps to predict when extra finance will be needed to avoid these problems