ch 29 and 30 COPY

Question 1

What is average cost or unit cost?

Answer 1

the cost of producing one unit, calculated by dividing the total cost by the output

Question 2

What are fixed costs?

Answer 2

a cost that does not change as a result of a change in output in the short run

Question 3

What is profit?

Answer 3

profit = total revenue - total costs
isthe surpluse left after all costs have been dedcted from revenew

Question 4

What is meant by the terms sales revenue?

Answer 4

the value of output sold in a particular time period
- it is calculated by price x quantity of output

Question 5

What is meant by the term sales volume?

Answer 5

the quantity of output sold in a particular time period
the formula for sales volume:
* Sales revenue
—————-
price

Question 6

What is meant to semi-variable cost?

Answer 6

a cost that consists of both fixed and variable elements

Question 7

What is meant by total cost?

Answer 7

he entire cost of producing a given level of output
- total cost = fixed cost + variable costs

Question 8

what is meant by total revenue?

Answer 8

the amount of money the business receives from selling output

Question 9

what is meant by variable costs?

Answer 9

a cost that rises as output rises

Question 10

what is the definition of break-even?

Answer 10

when a business generate just enough revenue to cover its total costs

Question 11

what is a break-even chart?

Answer 11

-a graph containing the total cost ad total revenue lines, illustrating the break-even output
-The level of output a business needs to produce so that total costs are exactly the same as total revenue is called the break-even output.

Question 12

what is the break-even output?

Answer 12

the output a business needs to produce so that its total revenue and total costs are the same

Question 13

what is contribution?

Answer 13

Contribution is the difference between the price a product is sold for and the price it cost to produce it.
REMEMBER that contribution is only the money left over after taking away the variable costs. This money then CONTRIBUTES towards other fixed cost such as rent, insurance and other expenditures. Only after all other costs are paid does it then add towards the profits of a business.

Question 14

What is the formula to work out contribution per unit?

Answer 14

contribution per unit = selling price - Variable cost

Question 15

What is meant by total contribution?

Answer 15

Unit contribution can calculate the contribution on the sale of one unit. However sometime you may want to work out the contribution of a larger quantity such as a whole year’s output. This is called Total Contribution.
Total contribution is used when the contribution for more than one unit sold is required. There are two different formulas you may want to use to calculate total contribution.

Question 16

How do you calculate total contribution?

Answer 16

total contribution = total revenue - total Variable Cost
- Total contribution = Unit contribution x number of units sold

Question 17

How can you use contribution to calculate profit?

Answer 17

Profit = Total contribution - Fixed Costs

Question 18

What is break even?

Answer 18

Break-even is essentially when the Total Revenue of a business is equal to the Total Costs of a business. All businesses, especially those just starting up, want to know how much money they need to make or how many units they need to sell in order to cover all the cost of there business.

At the point the business is making neither a profit nor a loss. Most businesses use this as a sort of ‘performance milestone’ where it shows that all costs have been covered and that any future sales will generate profits for the business.

Question 19

What is the break-even point?

Answer 19

The exact point where total revenue and total costs are equal is know as the Break-even point. This then tells a business that any future sales made after this point will account towards their profits.

Question 20

What is the break-even output?

Answer 20

The level of output a business needs to produce so that total costs are exactly the same as total revenue is called the break-even output.

Question 21

how do you calculate break-even?

Answer 21

Break-Even output = FIxed costs/ Contribution
- Break-even = fixed costs/ (selling price - Variable cost)

Question 22

What is meant by margin of safety?

Answer 22

Sometime businesses may want to know how much sales could fall before they start making a lose. This is called Margin of Safety. it refers to the difference in the break-even output and the output where profit is being made.

Businesses prefer to operate with a large margin of safety. This means that if sales fall they still might make some profit. With small margins of safety there is a risk that the business is more likely to make losses if sales fall.

Question 23

How is break-even analysis used?

Answer 23

Helps answers the ‘what if’ questions e.g.:
If price went up. What would happen to the break-even point?
-If the business introduced a new product line how many would the new product have to sell to at least break-even?
-If the businesses is just starting up, what has to be the level of output to prevent a loss being incurred?
-What will happen to the break-even point id costs are forecast to rise?
-Would the break-even point be lower if components were bought in from outside suppliers rather than being made in-house?
Break-even analysis is also found in business plans. Banks often ask for business plans when deciding whether or not to give a loan. So break-even analysis can be vital in gaining finance especially when starting up a business.

Question 24

What are the limitations to break-even analysis?

Answer 24

Output and stocks( it assumes that all out is sold, so output equal sales and no stocks are held. many businesses hold stocks of finished goods to cope with changes in demand, there are also times when firms cannot sell what they produce and choose to stockpile their output to avoid laying off staff.)

Unchanging conditions(the break-even chart is drawn for a set of given conditions, it cannot cope with a sudden increase in wages or price or changes in technology)

Accuracy of data (the effectiveness of break-even analysis depends on the quality and accuracy of the data used to construct cost and revenue functions, if the data is poor and inaccurate the conclusions that are drawn from the data are flawed; for example costs are underestimated or the level of output required to break even will higher than the break-even chart suggests)

Non-linear relationships( it is assumed that the total revenue and total costs lines are linear or straight. This may not always be the case e.g. a business may have to offer discounts on larger orders, so total revenues fall at high output. In this case the total revenue would rise then fall and be curved. Businesses can also lower costs by buying in bulk too, so costs may fall at high outputs and the cost function will be curved.)

Multi-product business(many businesses produce more than one single product. It** is likely that each product will have different variable costs and different prices, the problem is how to allocate the fixed costs of the multi-product business to each individual product. There are a number of ways but none are perfect. Therefore if the fixed costs incurred by each product are inaccurate break-even analysis is less useful)**

Stepped fixed costs(some fixed costs are stepped, for example in order to increase output a manufacturer may need it acquire more capacity. This may result in rent increasing therefore fixed cost would rise sharply. Under these circumstance it is difficult to use break-even analysis)

Question 25

ways of improving sales vol

Answer 25

1)advertising
2)promotion
3)improved targeting
4)extended product range
5)extend distention
5)develop relationship with customers

Question 26

improving sales revenue

Answer 26

1)changing prices (raising or lowering)
2)adding competentary services or products
(changing materials and keeping price same)

Question 27

unit cost or average

Answer 27

total cost/output