paper 2 revenue, costs, profit and loss Flashcards
what is revenue
income to the business from sales
how is revenue calculated
quantity sold x selling price
what are costs
payments business makes so it can make goods
examples of costs (5)
wages
materials
rent
interest on a loan
transport costs
why might a business want to minimise cost (2)
to increase profit
to be more competitive
how can you minimise costs (2)
use new technology
find a cheaper supplier
2 types of cost
fixed and variable
what are fixed costs
they dont change when a business changes amount produced eg rent
what are variable costs
they changed when amount produced changes eg raw materials used in production
how do you calculate variable cost
quantity soldx variable price cost per unit
how do you calculate total cost
add together total of all fixed and variable
what is profit and loss
loss is when costs are more than revenue so more money going in than coming out
profit is money left over from revenue once operating costs are paid
2 types of profit
gross and net
what is gross profit
profit as a result of buying and selling goods but doesnt take into account expenses
how do you calculate gross prosit
revenue-sales
what is net profit
profit as a result of buying and selling but takes into account running costs
how do you calculate net profit
gross profit- running costs
what are profitability ratios
calculations using financial data to measure performance of business
2 profitability ratios
gross profit margin and net profit margin
how do you calculate GPM
as a % gross proffit/revenue x100
how do you calculate NPM
as a % of sales revenue net profit/revenue x 100
yr1 yr2
revenue 150,000 225,000
cost of sales 80,000 140,000
gross profit 70,000 85,000
business expenses 40,000 55,000
net profit 30,000 30,000
what does a fall in gross profit indicate what action could you take
why has the net profit fallen what action should be taken
what do you note from the table
whilst sales increased business is paying more than it did in y1- could they buy from a different seller or ask supplier for discount (it is selling more books)
although gross profit has increased reduction in net profit is because of expenses have increased - look at why expenses have increased , can they cut doen on anything
revenue has increased by £75,000
gross profit has increased by £15.000
cost of sales has increased
business expenses have increased
net profit has stayed the same
if a business sells more by cutting prices is this always a good thing, explain
no revenue is increased but there is a loss of income on each item sold
is price increase ever beneficial explain
it might put someone off buying but lead to an increase in revenue particulaly if high end
what factors effect revenue due to price change (3)
number of competitior - no competitiors you can raise prices without fall in revenue as customers have nowhere else to go
if a lot of competitors sales and revenue may fall as customers buy elsewhere
action of competitors - if competitors raise prices you too can raise prices without loss of customer = increase revenue
starting price of product - if already cheap % rise will not effect consumer and revenues still might rise
if a business advertises will this always result in increase revenue
not always so need to ensure value for money
what is another way to increase revenue
increase product range
if a business has high fixed costs what must it ensure
it sells a high number of the products to cover costs
why do variable costs need to be analysed
materials can increase in price which increases variable costs which effect net profit
if this happens what should the business do
look at variable cost savings elsewhere ; buy from a different supplier or negotiate with the supplier
if a company makes large profit what can they do (4)
buy new equipment, take over another business, pay increase dividends to share holders, develop new products
If a company makes a loss what could they be faced with (4)
delaying decisions to buy new equipment and buildings
look to be taken over by another business
reduce or scrap dividends - shareholders may sell shares
decide if it can invest in new products or services , if they can,t they may face problems because competitors do
what is rate of return
amount you receive from making an investment
what is average rate of return
the average rate of return on average over the life of the investment
a gardening business spend £5000 on a mower which lasts 5 years costs £5000
income
y1 2000
y2 2500
y3 3000
4 3000
yr5 2500
total 13000
how do you calculate ARR
step 1 - profit from the mower
13000-5000=8000
step 2 average profit for 5yrs total profit/years
5000/5=1600
step 3 average rate of return = annual average profit x 100/cost of investment
1600/5000x100=32%
when is ARR useful
when comparing different investments you can look at what wlse you can do with your money eg 2% return from a bank so why take risk if ARR is only 4% 32% is a good return so a good investment
what could be the reason for a fall in GPM
fall in revenue
rise in cost sales
what action could the business take
fall in revenue - increase revenue by better marketing
reduce cost at sale
