3.3 - cost and revenue

Question 1

define costs

Answer 1

total expenditure a business incurs in order to run its operations. Costs are NOT price! Costs refer to the cost of production and price refers to the amount the product is sold for.

Question 2

define revenue

Answer 2

(also known as sales revenue)it refers to the amount of money a business generates from the sale of goods and services

Question 3

equation for revenue

Answer 3

TR=PQ
P - price per units
Q - quantity
P=TR/Q
AR=TR /Q
AR=P

Question 4

define profit

Answer 4

it is the difference between revenue and cost (obviously , a higher Revenue and a lower cost will generate a bigger profit):

Question 5

formula for profit

Answer 5

Pr=TR-TC

Question 6

define fixed costs

Answer 6

the costs of production a firm has to pay regardless of how much it produces or sells. They remain fixed in the short run (where at least one factor of production does not change).

Question 7

give 3 examples of fixed costs

Answer 7

Examples of Fixed costs are: rent, insurance, interest on loans. A firm has to pay these costs regardless of the production.

Question 8

what factor effects fixed costs

Answer 8

Fixed cost can change, but independently on the level of production (output). For example, a landlord might increase the rent or managers being paid a higher salary.

Question 9

explain variable costs

Answer 9

the costs of production that change in proportion with the level of production (output)or sales. Meaning that if the level of output or sales double the variable costs will also double (i.e. raw material costs will increase if a textile firm makes more curtains). They can be incurred in the short or the long run (where all factors of production are variable).

Question 10

what effects variable costs

Answer 10

Variable costs are pegged with the quantity produced; if there is no production the firm won’t incur in variable costs.

Question 11

give 3 examples of variable

Answer 11

sales commissions, packaging costs, energy usages costs

Question 12

what are total costs

Answer 12

the sum of fixed costs (FC) plus the variable costs (VC)

Question 13

equation for total costs

Answer 13

TC=FC+VC

Question 14

equations for average fixed costs (AFC)

Answer 14

AFC=FC/Q
Q - quantity produced
FC - Fixed costs

Question 15

equation for average variable costs (AVC)

Answer 15

AVC=VC/Q
Q= quantity produced
VC=variable costs

Question 16

explain direct costs

Answer 16

these are costs that can be identified with the production of specific goods and services and therefore can be easily traced and assigned to a particular department or process (known as cost centres). Unlike, Variable costs direct costs are not necessary related to the level of production.

Question 17

example of direct costs

Answer 17

the cost of meat for a burger fast food restaurant, the cost flour for a bakery or the cost of workers in a factory.

Question 18

indirect costs

Answer 18

these are costs that are not clearly identified with the production of specific goods and services and hence are very difficult to trace to a product activity, sale or department. Therefore, they are difficult to assign to a specific cost centre.

Question 19

4 examples of indirect costs

Answer 19

stationary, insurance, utility bills, legal expenses

Question 20

whats the difference between fixed costs and indirect costs

Answer 20

Indirect costs can be considered Fixed costs. However, the main difference is that they are not easily identified with a particular activity

Question 21

where can total revenue be obtained from

Answer 21

Total Revue is also know as Sales Revenue or Turnover and includes ALL income received , whether the sales are cash or credit. Moreover, a firms Revenue can also be obtained by other sources of income.

Question 22

what are 2 sources of income total revenue

Answer 22

• Rental Income – in case the firm has another property that generates an income. Also, some firms can rent their spaces in different seasons
• Sale of fixed assets – sell of unused or unutilized assets (i.e. machinery, old computers, furniture, stationary etc.)

Question 23

define dividends

Answer 23

when a firm is a shareholder in another business and receives the dividends.

Question 24

define interest on deposits

Answer 24

when a firm has money deposited in the bank and receives and interest (business can hold a substantial amount of money that generates high interest rates.

Question 25

define donations

Answer 25

a gift given by an individual or an organization (normally targeted to charitable organizations)

Question 26

define subsidies

Answer 26

financial assistance granted to support a firm that are in the public interest

Question 27

explain advertising revenues with an example

Answer 27

this is becoming more common nowadays since Facebook, Google and Twitter; for example; use this revenue. Over 80% of the revenues from twitter come from “text and display” advertising; Facebook and Google offer costs “per click” (advertisers pay when customers “click” on the advert) or for “thousand impressions” (advertisers pay based on the number of times their advert is displayed)

Question 28

define merchandise

Answer 28

some firms rely heavily on merchandise revenue in addition to admission charges (i.e. cinemas, theme parks, music concerts, etc.)