1.6 Revenue, Costs, Profits and Cash

Question 1

How to calculate sales revenue

Answer 1

Price x Quantity sold (sales volume)

Question 2

How to calculate average cost

Answer 2

Total cost / Quantity sold

Question 3

What is a fixed cost?

Answer 3

The costs that have to be paid before anything is actually produced. (A.K.A. Overheads) e.g. premises, staff, insurance, advertising.

Question 4

What is a variable cost?

Answer 4

The cost of raw materials, labour, energy and anything that directly relates to the product.

Question 5

How to calculate total costs

Answer 5

Variable costs + Fixed costs

Question 6

How to calculate basic profit

Answer 6

Total revenue - total costs

Question 7

How to calculate percentage change?

Answer 7

Q1 = original amount
Q2 = new amount

Q2 - Q1 / Q1 X 100

Question 8

What is contribution and how do you calculate it?

Answer 8

The difference between the price of a product and its variable cost. Every time a product is sold, the contribution helps pay off the fixed costs of the business. After break-even, profit is made.

Price - Average Variable Costs

Question 9

What is the break-even point (BEP)?

Answer 9

The level of output at which total revenue is equal to total costs. Neither a profit or loss is being made.

Question 10

If output is more than break-even is the business making a profit or loss?

Answer 10

Profit

Because revenue is larger than costs

Question 11

If output is less than break-even is the business making a profit or loss?

Answer 11

Loss

Because the revenue isn’t large enough to cover costs

Question 12

What does a break-even graph look like?

DRAW IT

Answer 12

Google the answer

Question 13

How to calculate the break-even point?

Answer 13

Fixed Costs / Contribution

Contribution = Price - Average variable costs

Question 14

What is the margin of safety?

Answer 14

The difference between the actual level of output and the breakeven level of output. It basically shows how little a business can make before it makes a loss.

Question 15

Is having a large margin of safety a good thing?

Answer 15

Yes, it puts the business in a safer position

Question 16

What are the ads/disads of break-even analysis?

Answer 16

A - Assesses a business idea. Finds the level of output needed. Shows the impact of one thing on another.

D - The model assumes many things such as costs and revenue staying constant. Markets are dynamic.

Question 17

What are the 4 stages of calculating net profit?

Answer 17

Revenue 
- variable costs
Gross profit
- fixed costs 
Operating profit
- tax and interest
Net profit

Question 18

What are the calculations for:

• Gross profit
• Operating profit
• Net profit

Answer 18

Gross = revenue - variable costs
Operating = revenue - (fixed + variable)
Net profit = revenue - (fixed + variable) - taxes - interest

Question 19

What is the statement of comprehensive income?

Answer 19

Profit and loss account, shows the company’s net profit and loss over a given time period. Minus values are in brackets.

Question 20

How do companies measure their profit?

Answer 20

Profit margins - tells the business what percentage of their revenue is actually profit. The ratio represented as a percentage.

Question 21

What are the 3 profit margins and how to calculate them?

Answer 21

Gross, operating and net

Profit (can be any of the 3) / turnover x 100

Question 22

Why are profit calculations and statements useless on their own?

Answer 22

They were designed to be compared, so more data is needed to compare the levels year by year or business to business.

Question 23

What is cash?

Answer 23

The money the business currently has availability to.

Question 24

What is a cash flow forecast?

Answer 24

A statement over time of the cash entering and leaving a business. the difference between inflow and outflow is the net cash flow and indicates if the business is able to stay alive

Question 25

What are the 5 stages of a cash flow forecast?

Answer 25

Inflows
Outflows
Net cash flow
Opening balance
Closing balance

Question 26

What can a cash flow forecast help a business plan for the future?

Answer 26

• if they need to take out a loan/overdraft
• if they need to get trade credit in some months
• some expenditures can be reduced or cut
• demand debtors to pay the money owed to the business early (deposit on a holiday eg)