CHAPTER 10 - Revenue, costs and break-even analysis

Question 1

Revenue

Answer 1

Revenue is the money a business makes from sales.

Total revenue = quantity sold x selling price

Profit = total revenue – total costs

Question 2

Fixed costs

Answer 2

Some costs will remain the same whatever the level of output produced or products sold. Fixed costs are costs that do not vary with output.

rent, mortgage, and the electricity for lighting, fridges etc.

Question 3

Variable costs

Answer 3

Variable costs vary in direct proportion to output – as output increases variable costs increase, as output falls variable costs fall.

e.g. tailor’s shop, - variable costs - cloth, cotton, buttons etc. None of these raw materials of the suits or
dresses made would be used if no goods were produced. So when output or sales are nil, then variable costs are nil. However, as soon as output starts, then these raw materials start being used. As more and more suits and dresses are made, so more and more cloth, buttons and cotton are used. We can therefore say that at output zero, variable costs are zero; but as output increases variable costs also rise.

Not all costs can be defined as fixed or variable. Some costs, such as labour, could be fixed (a permanent member of staff working a 38 hour week) or variable (the member of staff being asked to work 5 hours overtime due to increased demand). These types of costs are called semi-variable.

Question 4

Total costs

Answer 4

fc + vc

at zero output, fixed costs = total costs

Question 5

Direct Costs

Answer 5

Direct costs are costs that arise specifically from the production of a product or the provision of a service.
Examples of direct costs include:
• rent on a shop;
• materials or components;
• direct labour;
• expenses such as copyright payments on a published book, or licence fees for use of patents.

Question 6

Calculating costs

Answer 6

average total costs we simply divide total costs by output.

Question 7

Calculating break-even point using the contribution method

Answer 7

BE Output = Fixed costs divided by the contribution per unit

Question 8

BEPU

Answer 8

FRIXED COSTS / SP - VC

Question 9

CPU

Answer 9

SP - VC

Question 10

PROFIT PER SALES

Answer 10

(PREDICTED SALES - BREAKEVEN SALES) X CPU

Question 11

Break-even graph

Answer 11

fixed costs, variable costs, total costs and total revenue

*total cost line – this will always start where the fixed costs line meets the vertical (costs) axis.
vc = variable cost per unit x number of units.

• revenue line - sales price x number of units (output)

Question 12

Calculating profit and loss using a break-even chart

Answer 12

diff between the revenue line and the total costs line at the given level of output.

e.g to calculate profit at an output of 700 units - draw a vertical line up from the 700 output point. - meets both the total costs and revenue lines. To find out exactly how much profit is being made at this level of output (or any other output level), we measure the gap between the total revenue and total costs lines.

Question 13

The margin of safety

Answer 13

difference between output level and break-even output

So if output is 900 units and break-even is 500 units, then the margin of safety is 400 units

Margin of safety = actual sales − break-even sales