Revenue Costs Break Even Analysis

Question 1

What is revenue and total revenue

Answer 1

money a business makes from sales also called turnover

Question 2

Equation for total revenue
What can this equation be used for

Answer 2

money business receives from sales
TR= quantity sold x selling price
To calculate if they have made a profit or a loss

Question 3

When is a loss made

Answer 3

If costs are greater than total revenue

Question 4

What are fixed costs

Answer 4

costs that remain the same whatever the output eg rent, electricity, business rates

Question 5

What are variable costs

Answer 5

vary in direct proportion to output
If output increases variable costs increase
If output is zero variable cost is 0
If output increases variable costs increase because raw materials are being used

Question 6

Is this relationship always proportional

Answer 6

no because businesses can benefit from economies of scale and as output increases costs per unit straits to fall

Question 7

Are all costs either variable or fixed

Answer 7

no some can be both eg labour costs - semi variable as overtime can be a factor

Question 8

How are total costs calculated

Answer 8

fixed cost +variable cost

Question 9

What costs does a business have when output is 0

Answer 9

only fixed costs no variable so fixed cost=total cost

Question 10

What when a business starts production what will total cost be made up from

Answer 10

Fixed and variable

Question 11

What is average total cost

Answer 11

Cost of production of each unit of output

Question 12

Why does total cost fall as output increases

Answer 12

because total cost is made of fixed and variable

Question 13

When does this fall in cost as output increases stop

Answer 13

until diseconomies of scale force variable costs to rise which push up average total cost of production

Question 14

Managers must judge profitability what will they need to be considered in making this decision

Answer 14

They must decide to continue or discontinue production, invest in developing a product, increase Human Resources

Question 15

What information will be needed to support this decision and how is this done

Answer 15

profitability information - to do this a cost must be allocated to each product, branch or factory
This can be done by dividing costs into direct costs and overheads

Question 16

What are direct costs

Answer 16

costs from production eg rent, labour, materials

Question 17

If direct costs are total led what will they give you
What will this total not indicate and why

Answer 17

Cost of production
Revenue as it does not include indices=ct costs/overheads

Question 18

What are overheads

Answer 18

costs not related to production eg advertising

Question 19

What is the equation for average total cost

Answer 19

ATC = total cost/output

Question 20

What are the steps for break even analysis

Answer 20

Step 1 calculate monthly costs (separate fixed and variable)Identify what things are paid for each month which will be the same regardless of sales and cost variable - cost per unit to make
Step 2 calculate break even (how much each item sold makes for the business)

Question 21

Every product has a variable cost and selling price what is the difference between the two known as

Answer 21

the contribution

Question 22

What is the calculation for breakeven

Answer 22

BE = fixed cost/contribution per unit
Eg selling price is £9 variable is £5 so contribution is £4

Question 23

If fixed cost is £200/month and contribution is £4/box how many boxes are needed to sell to break even

Answer 23

2000/4 = 500

Question 24

How will they make a profit on the items

Answer 24

Selling more than 500 if they sell less than 500 it is a loss

Question 25

What does breakeven analysis allow th business to do

Answer 25

calculate profit and loss at different levels of output

Question 26

We know that with the product above if 650 boxes are sold profit will be made how do we calculate how much profit is made

Answer 26

difference between predicted and breakeven x contribribution
150x4=600=profit of £600

Question 27

What does the break even graph tell you about fixed costs

Answer 27

they are 3000 regardless of output

Question 28

How do we draw break even graph

Answer 28

Step 1 Plot fixed cost line
Step 2 add variable cost line by calculating variable cost at 3 points (if output is 0 variable cost is 0 points 1 and 2 calculate each output for eg 400 (variable cost x output level so 400x5=2000 select third output level eg 800 so 800x5=40000

Question 29

What are business costs at every level of output

Answer 29

costs are fixed +variable

Question 30

What will happen at 0 output to form point 1 what will point 2 be and point 3

Answer 30

there will only be fixed cost - point 1
Choose a level of output and fixed and variation eg at 100 fixed =3000 variable =2000 so total cost of output is 5000 - point 2
At 300 fixed cost is 3000 variable =4000 total =7000 3rd point

Question 31

What is the final line what does it tell the business

Answer 31

revenue line
Tells the revenue at any level of sale

Question 32

How is revenue calculated give an example

Answer 32

revenue - number of sales selling price
If sale =£9 at 0 sales revenue = 0 - point 1
Point 2 choose sales eg 200 sales x9=1800
Point 3 500 sales 500x9= 4500 sales

Question 33

How do you find profit or loss at different output

Answer 33

find the difference between the revenue line and total cost line at different outputs using break even chart
Eg calculate profit at 700
Draw a line up from 700 to meet total cost and revenue line (if to the right of break even = profit and revenue line is above total cost line. Then calculate the difference between 2 line

Question 34

What is business margin of safety

Answer 34

Difference between output level and breakeven output when output is above break even

EXAMPLE
If output is 900 units and breakeven is 500 units the margin of safety is 400

It is the amount demand can fall before business in cures losses

Question 35

How is business margin of safety shown on a graph

Answer 35

it is the difference between break point and actual level of output

Question 36

What will a business ensure and why

Answer 36

That they have a dog safety margin in case of sudden and unexpected drop in sales
A small margin puts the business at risk

Question 37

If costs and revenues are not fixed what can the break even chart show

Answer 37

increase or drop in revenue and or profit

Question 38

What will an increase in costs do to the revenue line
What happens if price is reduced

Answer 38

change it - it becomes steeper and will cut total cost line sooner so that break even will be at a lower level of output
The opposite

Question 39

What will the impact of increased variable costs be on the total cost line
What is costs are reduced
If variable costs remain the same but fixed costs change what happens

Answer 39

change it becoming steeper and it will ut revenue line at higher output level resulting in break even at a higher leve of out put
Opposite happens
A parallel shift in total cost line

Question 40

How useful is breakeven analysis why are they unhelpful

Answer 40

1 provides simple easy to understand representation of costs, revenue and potential profit
2 helpful part of business plan when seeking a loan
3 allows use of what if analysis - judge impact on profitability of cost and revenue changes - see impact of change on break even and margin of safety
1 BUT the method assumes all goods are sold and at the same price not wasted damaged or poor stock
2 linear relationships doesn’t work for economies of scale
3 some fixed costs are stepped as businesses grow costs may increase and there will be a sharp rise in fixed cost which makes it diffeicult to apply break even