1.6 (Revenue, Costs, Profits & Cash) Flashcards
1.6.1 What are fixed and variable costs?
+ examples of each
How to calculate total cost?
Fixed: costs which don’t change with output (use)
+ e.g rent, employee salaries, insurance
Variable: costs which do change with output (use)
+ e.g stock, utilities, wages
Fixed Cost + Variable Cost
How to calculate sales volume?
What is sales revenue and how do you calculate it?
number of units sold x period of time
total sales revenue/selling price per unit
Gross income produced through sales of products
(volume of good sold x average selling price)
What are the 4 categories of cost?
- production
- premises
- staff
- sales/marketing
1) What is revenue?
2) What is contribution per unit?
3) What is piece-rate labour?
4) What is operating profit?
1) The value of total sales made by a business within a period
2) The difference between selling price and variable costs
3) Paying workers per item they make
4) the amount remaining once all fixed and variable costs have been deducted from total revenue but before tax has been paid
What Is average cost?
+How do you calculate it?
What is capital spending?
How much it costs to produce one item
+Total cost/number of units
When a business invests in premises or equipment or something of long term benefit to the business
1.6.2 1) What is the margin of safety?
2) How to calculate break-even output?
3) How to calculate total contribution?
1) The amount by which current output exceeds the level of output necessary to break even
2) fixed cost/contribution per unit
3) contribution per unit x unit sales
What is break-even revenue?
+ what is break-even point?
total costs=total sales revenue at a given output
+ the point at which total sales of a business equal total costs
What is a break-even chart not related to?
+ How is PED important in relation to BE analysis?
Time
+ higher prices may mean fewer sales to break-even but these sales may take longer to achieve
+ lower prices may encourage more customers but higher volume is needed to break-even
1) What is penetration pricing strategy?
2) What is market skimming pricing strategy?
+ what do these mean for break-even?
1) high volume, low price
+ more sales needed to break-even
2) low volume, high price
+ fewer sales needed to break-even
Why would BE output increase?
+ Why would BE output decrease?
Rise in variable costs
Rise in fixed costs
Fall in selling price
+ the opposite of the above reasons
Strengths of Break-Even Analysis
+ used to identify target levels of output
+ helps entrepreneur understand risk level
+ shows the importance of minimising fixed costs
+ shows margin of safety
+ graph is very visual
+ investors/banks can use it to see whether to lend/invest
+ shows effects of financial changes
Limitations of Break-Even Analysis
- assumes all output will be sold
- assumes fixed costs never change
- ignores economies of scale
- less useful when a business sells multiple products
- hard to predict change in the structure of costs
- quickly out of date
- should be seen as a planning aid not a decision- making tool
