business revenue and costs

Question 1

what is meant by revenue

Answer 1

revenue is the money a business makes from sales. the total amount of money a business receives from it sales is called total revenue

Question 2

how is total revenue calculated

Answer 2

total revenue = quantity sold X selling price

Question 3

how is profit calculated

Answer 3

profit = total revenue - total costs

Question 4

how is total costs calculated

Answer 4

total costs = fixed costs + variable costs

Question 5

how is break even calculated

Answer 5

fixed costs
/
selling price per unit - variable cost per unit

Question 6

what is meant by break even

Answer 6

a diagram that shows the level of output where a business does not make a profit nor a loss

Question 7

what are the different types of costs to a business

Answer 7

fixed costs

variable costs

semi - variable costs

direct costs

indirect / overhead costs

total costs

Question 8

what is a fixed cost

Answer 8

fixed costs do not vary / change with output. fixed costs only change in the long run. for example: rent, management salaries, interest charges and depreciation

Question 9

what is a variable cost

Answer 9

a cost that can vary in direct proportion to changes in output. for example raw materials, fuel and labour

Question 10

what is a semi variable cost

Answer 10

costs that contain both fixed and variable elements, such as telephone charges where there is a fixed standing charge plush an extra rate that caries according to the number of calls made

Question 11

what is a direct cost

Answer 11

costs that arise specifically from the production of a product or the provision of a service.

examples:
rent on a shop
direct labour
materials or components

these direct costs can be totaled to give the direct costs of producing the product. however, revenue minus the direct costs does not indicate profitability. the business must also apportion overheads or indirect costs to the product

Question 12

what are overheads / indirect costs

Answer 12

costs not directly related to production

examples:
advertising costs
employing the secretary or receptionist

Question 13

what is meant by contribution

Answer 13

it is the difference between the income generated from sales and the variable costs of producing the goods those sales. this allows a business to analyse whether each of its products covers its own variable costs .

contribution is used to pay the companies overheads (fixed costs). once these have been covered, additional contribution generates profit

Question 14

how is contribution calculated

Answer 14

contribution per unit = selling price per unit - variable costs per unit

Question 15

what is the margin of safety

Answer 15

it shows how much a producer can reduce output before the business starts to make a loss

Question 16

whatare the advantages of using break-even

Answer 16

easy visual means of analyzing a businesses financial position at different levels of output
gives a valuable rule-of-thumb guide to potential profitability

cheap to construct and can be carried out quickly

profit and loss situation can been seen at a glance - good for nonfinancial- specialists

helpful for making decisions in ‘what if’ situations - can cope with changing circumstances in relation to revenue and cists

can be used as past of a business plan and can be helpful in gaining finance

target setting made easier

can identify the margin of safety - aids planning

Question 17

what are the limitations of break even

Answer 17

often regarded as too simplistic as some assumptions are unrealistic

it assumes all output is sold, which is often not the case

assume conditions remain unchanged - wages, prices and technology can all change suddenly

relies on data being accurate and often under or over-estimates are made

assumes that total revenue and cost curves are always linear - this may not be the case.

allocating fixed costs in a multi product business can be problematic - thus making break-even analysis output inaccurate .
fixed costs are often stepped- this makes break - even analysis difficult

Question 18

what is profit

Answer 18

the difference between the total revenue of a business and the total cost of a business, when revenue is greater than cost