Revenue, costs and break even Flashcards
Revenue
This is the money a business makes from sales. It is the value of the sales and is also referred to as turnover
Fixed Costs
This is a cost to a business that does not change in the short run
Variable costs
These costs rise as output rises
Total cost
These are the entire costs for a business. This is calculated by adding together fixed costs and variable costs
Average total cost
Total cost divided by the number of goods produced
Direct costs
These are costs that arise specifically from the production of a product or the provision of a service
Indirect costs
These are costs that are not directly related to production also known as overheads
Semi Variable
Where there is a mixture of fixed and variable - eg you work 40 hours but do 5 hours overtime the overtime is classed as semi variable
How to calculate total revenue
quantity sold x selling price
How to calculate contribution (per unit)
selling price - variable cost
How to calculate break even (output)
fixed costs / contribution pu
How to calculate margin of safety
capacity - break even point
How to calculate profit
margin of safety x contribution
Advantages of break even
- can be used in a business plan to gain finance from banks / investors
- easy visual gives a valuable guide to potential profits (can analyse a businesses financial position)
- cheap to create
- improves target setting
Disadvantages of break even
- often seen as simple and inaccurate (overestimations can be made)
- assumes conditions stay the same (external factors are not considered e.g COL / covid which can have a huge effect on profits)
- assumes all output is sold
- assumes that total rev / total costs curves are linear - does not always sell consistently
