Business revenue and costs Flashcards
What are fixed costs
costs that do not change in regard to output (rent and managers salaries)
How are fixed costs shown on a break even chart
As a straight horizontal line
What are variable costs
Costs that change in regard to the output produced (raw materials)
How are variable costs shown on a break even chart
Start at zero and slope upwards
What are semi variable costs
Costs that are partly fixed and partly variable (employees may get a base salary and commission)
What are direct costs
Costs that are easily attributable to a unit of output (the amount of sugar weighed out when baking a cake)
What are indirect (overhead) costs
All other costs incurred that cannot be directly tied to an individual unit of output (admin costs or heating bills)
What are total costs
Fixed costs plus total variable costs
How are fixed costs shown on a break even chart
Start at the fixed costs point and slope upwards parallel to the variable cost line
What is revenue (include the formula)
The money coming in from the sale of goods and services, revenue = selling price x quantity sold
What is breakeven
The point at which a business is not making a profit or a loss, at this point total costs are equal to total revenue
What does contribution pay for
Its own variable costs, fixed costs and then profit
What is the formula for contribution
Contribution = selling price - variable costs
What is the formula for breakeven involving contribution
BE = fixed costs / contribution
What is the margin of safety
How much actual output is above the break even level of output
What is the formula for margin of safety
Actual output - Break even level of output
What are the negatives to break even analysis
Must be treated with caution because it assumes that costs are static when in reality they change
In which ways can fixed costs change
Landlord puts rent up, bank changes interest rates, management want a pay increase
In which ways can variable costs change
Raw materials change in price, minimum wage is increased, utilities companies change price
In which ways can selling price change
New competitors enter the market, positive word of mouth increases demand
What are the strengths of break even
Allows for calculation of minimum number of sales needed before starting to make a profit, calculate level of profit at varying levels of output, predict outcome of changing variables, provides a target, include in business plan
What are the weaknesses of break even
Based on predictions, ignores varying costs (including fixed over time), does not ensure anything will materialise
