3.3 Costs and breakeven

Question 1

What is total revenue? And how to calculate it?

Answer 1

Money generated from selling its products or services produced. Price x Quantity

Question 2

What are fixed costs? Give 2 examples.

Answer 2

Costs that do not vary with level of output.
*Rent
*Gas
*Electric
*Salaries
*Insurance
*Interest on a bank loan

Question 3

What are Variable costs? Give 2 examples.

Answer 3

Costs that change when output levels change.
*Raw materials
*Packaging
*Piece work staff
*Delivery costs
*Incentive and bonus

Question 4

What is piece work staff?

Answer 4

Form of employment where an employee receives payment based on the number of items produced.

Question 5

Define costs.

Answer 5

Expenses that must be met when setting up and running a business

Question 6

What does a fixed cost graph show?

Answer 6

X axis = Output
Y axis = Costs
Horizontal Line

Question 7

What does a variable cost graph show?

Answer 7

X axis = Output
Y axis = Costs
Diagonal Line

Question 8

What are total costs?

Answer 8

All fixed costs + All variable costs

Question 9

Is Rent fixed or variable?

Answer 9

Fixed

Question 10

Is Packaging fixed or variable?

Answer 10

variable

Question 11

Is raw materials fixed or variable?

Answer 11

variable

Question 12

Is Insurance fixed or variable?

Answer 12

fixed

Question 13

How to calculate average costs?

Answer 13

Average cost = Total cost/Quantity produced

Question 14

In a break-even graph, the break-even point is when:

Answer 14

Total costs and revenue are the same

Question 15

6 MARKS - How useful are break-even calculations? (For NOF when deciding to include ice cream in its product range)

Answer 15

AO2 -
NOF can see they will need to sell 55 ice creams each day to break even
NOF can use this info to decide if its possible for them to sell 55 tubs every day for a year

AO3 -
It will help NOF to see at what point it starts making a profit and can ask ‘what if’ questions to see what impact it has on the break-even point
This might stop NOF from making ice creams as they might not be able to sell 55 tubs all year round.

Question 16

How to calculate break-even point?

Answer 16

Fixed costs / (Selling price - Variable cost per unit)

Question 17

6 MARKS - Analyse the benefits to Backyard Shoez of using break-even analysis to plan the launch of its new shoes for men and children. (monthly fixed costs of 100 000 Ks and variable cost 3 500 Ks for pair of shoes, selling at 4 300 Ks)

Answer 17

AO2 -
Backyard Shoez will be able to see that it needs to sell 125 pairs before it can break-even
Backyard Shoez can ask ‘what if’ questions and see what impact various price changes have on the break-even point

AO3 -
This will enable Backyard Shoez to know if they are breaking even and moving into profit
They can raise or lower the price to become more competitive with other shoe shops.