LO2 - Understand what makes a product or service financially viable Flashcards
What are the two types of costs for a business?
Fixed costs and Variable costs
What is a fixed cost?
A cost which does not change
What is a variable cost?
A cost which changes
What is the formula for Total Cost?
Total Cost = Fixed Cost + Variable Cost
What is meant by the term ‘break even’?
Where a businesses costs are equal to its revenue. The business is making 0.
What is the formula for break even?
Break Even = Fixed Cost / (Selling Price - Variable Cost)OrBreak Even = Fixed Cost / Contribution
What is meant by the term contribution?
The difference between the selling price and variable cost per product. For example, if a product costs £1.00 to make (variable cost) and it is sold for £2.50 (selling price), the contribution would be £1.50. This money would count towards the businesses overall revenue (income).
What is meant by the term revenue?
Finances generated though the sales of products/services.
Rent, loan repayments, insurance, advertising, salaries and utilities are examples of what?
Fixed costs
Raw materials, components, stock and packaging are examples of what?
Variable costs
What is the formula for total revenue?
Revenue = Selling Price x Number of sales
What does the blue line represent?
Fixed costs
What does the green line represent?
Revenue
What does the red line represent?
Total costs
What is the break even output?
500
If the business sold 800 products, what is the margin of safety?
300
Why are raw materials considered to be a variable cost?
The cost of extracting and producing raw materials changes. If a business was to purchase 1 apple at 10p one week and 50 apples at £5 the following week, the cost has changed. Therefore, this makes it a variable cost. If i aim to sell more, i would need to puchase or make more products.
Variable cost = A cost which changes with output.
