Costs and revenues/BEP/profitability

Question 1

Total revenue -

Answer 1

• revenue gained from total sales, price x number of units

Question 2

Total fixed costs -

Answer 2

• costs that do not vary with output

Question 3

Variable cost per unit -

Answer 3

• cost that varies per unit of outcome

Question 4

Total variable costs -

Answer 4

• variable costs of all units sold, number of units x variable cost per unit

Question 5

Total costs =

Answer 5

= total fixed costs + total variable costs

Question 6

Profit =

Answer 6

= revenue - total costs

Question 7

Profit (2)

Answer 7

1. Used as measure of success
2. Larger profit -> greater return on investment

Question 8

Benefits of profits (4)

Answer 8

1. Businesses become more attractive to the customers -> selling the desired product
2. Persuade investors (banks/individuals) -> easier to raise finance/expansion decisions
3. Attract takeover by larger firms
4. Good supplier relationship

Question 9

Loss -

Answer 9

• when costs are greater than revenue

Question 10

Revenue objectives (5)

Answer 10

1. Challenging objectives help to grow
2. Usually used to assist with building a customer base and establish inside the market
3. Businesses that sell product of short - term life cycle will aim for revenue objectives
4. Suits for charities to maximise revenues for chosen cause
5. Can relate to an aspect of business rather than the entire business

Question 11

Aggressive type of revenue objective -

Answer 11

• the rate at which revenue is increasing rises from 1 year to another

Question 12

Revenue objectives don’t always increase profits (2)

Answer 12

1. Higher costs on advertising
2. Reduction prices -> competition also reducing prices

Question 13

Cost objectives (2)

Answer 13

1. Reducing costs by a given percentage/amount at a stated time period: maintain profit in a market with falling prices
2. Cost minimisation to offer low prices to consumers (value for money):
   - popular due to publicity of low - cost services
   - minimising costs of production
   - aim to operate with minimal expenditure

Question 14

Profit objectives (3)

Answer 14

1. Simple figure: based on profits generated in previous years and take into account any expected changes in business activity over the foreseeable future
2. Percentage increase in profits: usually a yearly target representing a % increase in profit on the previous year
3. Percentage compared to sales: profit margin

Question 15

Small fall in demand (4)

Answer 15

1. Products differentiated from competitors
2. Products are necessities
3. Increase prices
4. Demand in price inelastic

Question 16

Demand rises significantly (3)

Answer 16

1. Competitors sell similar product
2. Reduce prices
3. Demand is price elastic

Question 17

Reasons to calculate BEP (5)

Answer 17

1. If profitable/viable
2. Level of output to generate sales
3. Finance raise
4. Impact of changes in production
5. Effects of prices/costs

Question 18

Total contribution =

Answer 18

= revenue - total variable costs

Question 19

BEP =

Answer 19

= FC/contribution per unit

Question 20

How to do a BEP graph (5)

Answer 20

1. Label both axis
2. Horizontal line to show FC
3. Add VC from origin
4. TC parallel to VC
5. Calculate revenue and plot on the graph

Question 21

Profit (contribution) =

Answer 21

= contribution - FC

Question 22

Analysis of graph (3)

Answer 22

1. Analysing impact of changing costs/prices on profitability
2. Deciding whether to accept an order for products at prices different from those normally charged
3. Can benefit financial planning and decision making

Question 23

Advantages of BEP analysis (4)

Answer 23

1. Effect of number of customers/how change in price/cost will impact
2. No need for expensive training -> simple technique
3. Immediate result
4. Raising finance -> support application for a loan

Question 24

Disadvantages of BEP analysis (5)

Answer 24

1. Nothing about levels of sales that business might achieve
2. Simplification of real world -> don’t sell all goods at the same price
3. Difficult when business sells a number of different products
4. Costs don’t rise as steadily
5. As accurate as the data it’s based on -> if wrong date -> wrong BEP

Question 25

Contribution -

Answer 25

• profit per unit without FC

Question 26

Margin of safety -

Answer 26

• measures the amount by which business’s current level of output exceeds BEP

Question 27

BEP -

Answer 27

• level of output where revenue exactly equals the total costs

Question 28

Profit margin (def and formula)

Answer 28

• as a percentage compared to sales
  = profit/revenue x 100

Question 29

Return on investment (def and formula)

Answer 29

• annual return in the form of operating profit as a percentage of the amount that was invested
  = profit from the investment/capital invested in project x 100

Question 30

Advantages of profit margin (2)

Answer 30

1. Profit objectives are simple to understand and measure
2. Help to motivate employees

Question 31

Disadvantages of profit margin (2)

Answer 31

1. Risky: if a business suffers an unexpected change it can result in lower profit than forecast -> evidence of under - performance (might be public)
2. Falling share prices and nerviness among banks and other financial institutions that have lent the business money

Question 32

Return on investment (6)

Answer 32

1. Higher figure is preferable
2. Many investments are long-term -> too simplified formula
3. Alternative uses for capital concerned
4. Financial objective should exceed alternatives in the long - term
5. Lower objective if the choice is relatively safe
6. The project with higher return might be too risky