6.3 Financial Terms And Calculations

Question 1

What are variable costs?

Answer 1

Costs that change depending on the output of a business

Question 2

What are fixed costs?

Answer 2

Costs for a business that do not change, no matter what the level of output for the business

Question 3

What are total costs?

Answer 3

Fixed and variable costs added together, giving the total overall costs for a business

Question 4

What is revenue?

Answer 4

Any money that a business makes from selling their products and services

Question 5

What are costs?

Answer 5

Anything that a business pays for

Question 6

What is profit?

Answer 6

Any revenue left after all business costs have been paid

Question 7

What is loss?

Answer 7

When costs exceed revenue and the business loses money

Question 8

What are the main investment projects businesses undertake?

Answer 8

• Investment in new machinery
• Investment in new buildings
• Investment in new buildings
• Investment in new vehicles

Question 9

How do you calculate the average rate of return?

Answer 9

Average rate of return = Average yearly profit / Cost of the investment x 100

Question 10

What is break-even output?

Answer 10

The level of production at which a business’s total costs and revenue from sales are equal

Question 11

What is a break-even chart

Answer 11

Shows a business’s costs and revenues and the level of production needed to break-even

Question 12

How do you identify the break-even level of output of output on a break-even chart?

Answer 12

It is the point where the revenue and total costs line cross

Question 13

How do you identify the margin of safety on a break-even chart?

Answer 13

You use the equation margin of safety = actual sales - break-even sales

Question 14

What are the advantages of using a break-even chart?

Answer 14

• Shows the effects of changes in price, if the business increases its price it will need to sell fewer units of output to reach break-even output
• Shows if a business is facing changing costs and will have to adapt to circumstances
• Can help businesses get a bank lown

Question 15

What are the disadvantages of using a break-even chart?

Answer 15

• Break-even analysis assumes the business sells all the output that it produces. If it does not sell its output, it will not recieve the revenue
• If costs and prices change regularly, the level of a business’s break-even output will change regularly too which makes it more difficult to use break-even analysis effectively