5.3 and 5.4 Revenue, Costs, Profits and Break-even Flashcards
How is contribution calculated?
Selling price - variable cost per unit
How can a business increase sales revenue?
Change the price (increase or decrease). Increase the amount sold.
Define break-even level of output.
The level of output at which a business neither makes a profit nor a loss.
Define variable costs.
Costs that change in direct relation to the quantity produced.
Give three examples of variable costs.
Packaging, raw materials, delivery costs.
Define fixed costs.
Costs that do not change as the number produced changes.
What is the formula for sales revenue?
Quantity sold x selling price
How is profit calculated?
Sales revenue - total costs.
Define margin of safety.
The amount by which a business’ actual output is greater than its break-even output level.
Other than changing the price, how can a business increase the number of products sold?
Increase advertising.
Sell in a greater number of outlets. Increase product range.
True or false - sales turnover is another name for sales revenue.
TRUE
How can reducing the price of a product increase sales revenue?
For price elastic goods, significantly more will be sold at the lower price, resulting in more revenue.
Give three reasons why break-even forecasts should be treated with caution.
Forecast costs could be different.
Figures are usually for one product. Assumes all output sold.
Give three examples of fixed costs.
Rent, business rates, insurance.
How are total costs calculated?
By adding all fixed costs and all variable costs at a particular level of output.
Describe what contribution is used for.
Initially it covers fixed costs. Once fixed costs are paid, it becomes profit.
What is the break-even formula?
Fixed costs / (selling price-variable cost per unit)
How is revenue calculated?
Price x quantity sold.
What are the two types of profit?
Gross profit.
Net profit.
How is gross profit calculated?
Gross profit = Revenue - cost of sales.
How is net profit calculated?
Net profit = Gross profit minus expenses (costs of running the business).
What is the difference between cost of sales and expenses?
Cost of sales are the costs directly involved with making the product (e.g. materials, packaging), whereas expenses are the costs of running the business (e.g. wages, electricity).
What are the two profitability ratios?
Gross profit margin
Net profit margin
How is the gross profit margin calculated?
Gross Profit/Revenue x 100
How is the net profit margin calculated?
Net Profit/Revenue x 100
What does an increasing gross profit margin tell us?
That Prices have risen or Cost of Sales have fallen (or a combination of both).
What does an increasing net profit margin tell us?
Gross profit has increased and/or expenses have fallen.
What is the formula for average rate of return?
The amount you receive from making an investment. Annual profit as a percentage of the initial investment.
What is the formula for average rate of return?
Average annual profit/initial investment x 100
What are the three steps to take when calculating average rate of return?
- Calculate expected profit from the investment.
- Calculate average annual profit.
- Apply the ARR formula (average annual profit/initial investment x 100)
What are profitability ratios?
Calculations which show different kinds of profit as a percentage of revenue. They help to interpret financial data.
