measurement and importance of profit

Question 1

why is it important for business’ to know there total costs

Answer 1

-helps with pricing decisions, so they can put the price above the cost (cost-plus-pricing)
-helps with output decisions, and if they need to produce more to reduce cpu
-helps decide whether they should enter the market, whether the business’ idea of a price is too high for what customers are willing to spend
-highlight problems

Question 2

what is revenue

Answer 2

total value of sales
price X quantity sold

Question 3

how to increase revenue

Answer 3

-increase price, but the product will need to be differentiated so customers are willing to pay a higher price BUT risk that sales will be lower if price is too high
-reduce price, to improve sales and make the lower price more attractive for more customers to buy
-increase quantity sold, via advertising

Question 4

definition of fixed costs

Answer 4

costs that do not change when level of output changes
e.g rent

Question 5

definition of variable costs

Answer 5

costs that do change as level of output changes
e.g. raw materials

Question 6

how to reduce variable costs

Answer 6

benefit from eos, so as the level of output increases, the costs will decrease

Question 7

total costs =

Answer 7

fixed costs + total variable costs

Question 8

average costs / unit cost =

Answer 8

total costs / output

Question 9

definition of direct costs

Answer 9

costs that are directly related to the production of a particular product, will change as level of output changes
e.g. raw materials, wages

Question 10

definition of indirect costs

Answer 10

costs that aren’t directly related to the production of products, and may stay the same as level of output changes
e.g lighting, packaging materials

Question 11

what do a firms profits depend on

Answer 11

-profit margin (profit per item)
-quantity sold, higher quantity sold=more profit