Financial Planning 2.2 Flashcards
What is the equation for total revenue?
Quantity sold x selling price
How can a business increase sales revenue?
- Increase price of product
- Put items on sale
- Marketing campaigns
What is the equation for total costs?
Fixed cost + variable cost
What is the equation for the total variable cost?
Variable cost per unit x quantity
What are fixed costs?
Costs that don’t change when a business alters its level of output
- Rent/ insurance
What are variable costs?
Costs that alter directly with the business’s level of output
-Materials/ hourly wages
How can a business cut fixed costs?
- Negotiate with landlord
- Move to cheaper rented area
- Employ less people but maintain services
How can a business cut variable costs?
- Buy cheaper materials
- Bulk purchase products
- Reduce waste
What are semi variable costs?
e.g. transport, electricity, gas
- Cost composed of a mixture of both fixed and variable components
What is contribution?
Difference between sales and variable costs of production
What is the equation for contribution?
Total sales - total variable cost
What is the equation for contribution per unit?
Selling price per unit - variable cost per unit
What is the equation for total contribution?
Contribution per unit x number of units sold
What is the equation for profit?
Total revenue - fixed cost
What is the equation for profit (contribution way)?
Contribution - fixed cost
What is breakeven?
Earning enough sales to cover all costs
total sales= total costs
What is the equation for breakeven?
Fixed cost/ contribution per unit
What is margin of safety?
Difference between actual output and the breakeven output
What is the equation for the margin of safety?
Actual output - breakeven output
What are the strengths of breakeven analysis?
- Focuses on output required for profitability
- Better understand viability + risks
- Importance of keeping FC low
- Easy + quick to do
What are the limitations of breakeven analysis?
- Unrealistic assumptions
- Sales unlikely to be same as output
- VC not always same
- Businesses sell more than 1 product
