5.3 and 5.4 Revenue, Costs, Profits and Break-even

Question 1

How is contribution calculated?

Answer 1

Selling price - variable cost per unit

Question 2

How can a business increase sales revenue?

Answer 2

Change the price (increase or decrease). Increase the amount sold.

Question 3

Define break-even level of output.

Answer 3

The level of output at which a business neither makes a profit nor a loss.

Question 4

Define variable costs.

Answer 4

Costs that change in direct relation to the quantity produced.

Question 5

Give three examples of variable costs.

Answer 5

Packaging, raw materials, delivery costs.

Question 6

Define fixed costs.

Answer 6

Costs that do not change as the number produced changes.

Question 7

What is the formula for sales revenue?

Answer 7

Quantity sold x selling price

Question 8

How is profit calculated?

Answer 8

Sales revenue - total costs.

Question 9

Define margin of safety.

Answer 9

The amount by which a business’ actual output is greater than its break-even output level.

Question 10

Other than changing the price, how can a business increase the number of products sold?

Answer 10

Increase advertising.

Sell in a greater number of outlets. Increase product range.

Question 11

True or false - sales turnover is another name for sales revenue.

Answer 11

TRUE

Question 12

How can reducing the price of a product increase sales revenue?

Answer 12

For price elastic goods, significantly more will be sold at the lower price, resulting in more revenue.

Question 13

Give three reasons why break-even forecasts should be treated with caution.

Answer 13

Forecast costs could be different.

Figures are usually for one product. Assumes all output sold.

Question 14

Give three examples of fixed costs.

Answer 14

Rent, business rates, insurance.

Question 15

How are total costs calculated?

Answer 15

By adding all fixed costs and all variable costs at a particular level of output.

Question 16

Describe what contribution is used for.

Answer 16

Initially it covers fixed costs. Once fixed costs are paid, it becomes profit.

Question 17

What is the break-even formula?

Answer 17

Fixed costs / (selling price-variable cost per unit)

Question 18

How is revenue calculated?

Answer 18

Price x quantity sold.

Question 19

What are the two types of profit?

Answer 19

Gross profit.

Net profit.

Question 20

How is gross profit calculated?

Answer 20

Gross profit = Revenue - cost of sales.

Question 21

How is net profit calculated?

Answer 21

Net profit = Gross profit minus expenses (costs of running the business).

Question 22

What is the difference between cost of sales and expenses?

Answer 22

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).

Question 23

What are the two profitability ratios?

Answer 23

Gross profit margin

Net profit margin

Question 24

How is the gross profit margin calculated?

Answer 24

Gross Profit/Revenue x 100

Question 25

How is the net profit margin calculated?

Answer 25

Net Profit/Revenue x 100

Question 26

What does an increasing gross profit margin tell us?

Answer 26

That Prices have risen or Cost of Sales have fallen (or a combination of both).

Question 27

What does an increasing net profit margin tell us?

Answer 27

Gross profit has increased and/or expenses have fallen.

Question 28

What is the formula for average rate of return?

Answer 28

The amount you receive from making an investment. Annual profit as a percentage of the initial investment.

Question 29

What is the formula for average rate of return?

Answer 29

Average annual profit/initial investment x 100

Question 30

What are the three steps to take when calculating average rate of return?

Answer 30

1. Calculate expected profit from the investment.
2. Calculate average annual profit.
3. Apply the ARR formula (average annual profit/initial investment x 100)

Question 31

What are profitability ratios?

Answer 31

Calculations which show different kinds of profit as a percentage of revenue. They help to interpret financial data.