Costs, Revenue And Profits

Question 1

How is revenue generated and what is it’s equation?

Answer 1

By a business selling goods and services
It is a form of cash inflow
Quantity x price

Question 2

What forms of cash inflow are not classed as revenue?

Answer 2

Cash inflow from non trading sources, such as loans recieved, sale of assets and owners capital

Question 3

Define costs?

Answer 3

The spending that occurs to set up and run a business

Question 4

What are the two types of costs?

Answer 4

• Fixed costs
  Do not change with output, eg. rent, marketing, insurance and electricity cost
• Variable costs
  Do change with output, eg. raw materials, workers’ wages

Question 5

What is the equation for contribution per unit?

Answer 5

Sales price per unit - variable cost per unit

Question 6

What is the equation for break even point?

Answer 6

Fixed costs / Contribution per unit

Question 7

What is break even point and what is it measured in?

Answer 7

• It is the number of units required to be sold to cancel out the costs
• It is measured in units
• It is where costs and revenue cross on a graph

Question 8

What is the margin of safety?

Answer 8

Is the difference between break even units and current units sold

Question 9

What is the equation for margin of safety?

Answer 9

Actual/budgeted sales/output - break even sales/output

Question 10

What does a positive MOS mean?

Answer 10

The business is profitable, and sales can fall by more before reaching break even point