Revenue, costs, profit and break-even

Question 1

define revenue

Answer 1

the monetary value of sales made by a business within a period

Question 2

what is revenue also known as?

Answer 2

income
turnover
sales reciepts
takings

Question 3

what is the calculation used to calculate the firm’s total revenue?

Answer 3

total revenue = selling price per unit x quantity sold

Question 4

what are three ways a business can increase revenue and expand on the first two ones?

Answer 4

increase selling price -
firms may choose to increase selling price to achieve higher revenue from each sale which is favoured by companies and luxury goods or goods that are price inelastic
however this can mean some consumers will choose not to purchase the product at the higher price so can harm overall revenue and a firm is unlikely to be successful if the firm sells a product where there are many direct competitors

decrease selling price -
should lead to an increase in quantity sold

approach taken by firms like supermarkets

firms take this approach when they have many direct competitors and consumers are not especially brand loyal

increase number of goods they sell

Question 5

define costs

Answer 5

the expenses incurred by a firm in producing and selling its products and is likely to include expenditures such as wages as well as the cost of raw materials needed to produce the products

Question 6

what categories can a firm’s cost be classified?

Answer 6

fixed costs
variable costs
semi-variable costs

Question 7

define fixed costs and give examples

Answer 7

costs which do not vary directly with the level of output eg rents, salaries, insurance costs, business rates

this means that fixed costs such as rent will not increase if the firm produces and sells more units

Question 8

how is fixed costs shown on a graph?

Answer 8

by a flat line on the graph

Question 9

what is meant by variable costs?

Answer 9

costs that increase in proportion to the amount of output produced
as output increases more raw materials will be required so variable costs will increase and vice versa

Question 10

what is the formula of calculating total variable costs?

Answer 10

variable costs per unit x quantity sold

Question 11

how is total variable costs shown on a graph?

Answer 11

as an increasing line which always start at zero

Question 12

how to workout total costs?

Answer 12

fixed costs + total variable costs

Question 13

how is total costs shown on a graph?

Answer 13

always start from the fixed costs line

Question 14

what is meant by semi-variable costs?

Answer 14

some costs are made up as a fixed and a variable aspect
the cost changes with output eg a staff may usually work 38 hrs a week but when it is busy they may work 5 hrs overtime due to high demand

Question 15

what is meant by direct and indirect costs?

Answer 15

direct costs -
they are costs which can be identified directly with the production of a good/service
costs which arise specifically from the production of a product
eg materials/components, direct labour, expenses such as copyright payments on a published book

indirect costs -
when the production of any product results in paying costs not directly related to each specific product/service provision

Question 16

how to calculate profit?

Answer 16

total revenue - total costs

Question 17

what is the impact of costs, revenue and profit on entrepreneurs/owners/the business?

Answer 17

costs -
can affect level of profit received

revenue -
can affect success of business

profit -
higher profit means higher drawing
limited company’s shareholders’ dividends can be affected by the amount of profit made

Question 18

what is the impact of costs, revenue and profit on customers?

Answer 18

costs -
if costs rise the selling price of goods may increase

revenue -
if the business generates sufficient profit it may then develop new products giving the customers a greater choice

profit -
a business may charge higher prices to improve profits which may have a negative effect on customers

Question 19

what is the impact of costs, revenue and profit on employees?

Answer 19

costs -
if costs rise, employees may not get pay rises
high costs could lead to employee redundancies

revenue -
higher sales revenue can lead to bonuses and pay rises

profit -
if business makes higher profits, it can pay employees higher wages
with good levels of profit the business can afford to train employees

Question 20

what is the impact of costs, revenue and profit on the government?

Answer 20

costs -
higher costs can lead to less profits so less tax paid by businesses

revenue -
increasing revenue leads to more profits so more corporation tax paid to the government

profits -
same as costs and revenue

Question 21

what is the impact of costs, revenue and profit on the bank?

Answer 21

costs -
if the business has increased costs, it may impact its ability to pay off a bank loan and interest

revenue -
increasing revenue means a better position to pay off existing loans/debts
successful businesses more inclined to expand therefore borrow money from the bank

profit -
if business receives good levels of profit then the bank can be confident it will receive its payments on loans and other type of borrowing

Question 22

define break even

Answer 22

the level of sales a firm must achieve to cover its costs
it is when total costs are equal to total revenue so the business is making neither a profit nor loss

Question 23

how to calculate contribution?

Answer 23

selling price per unit - variable cost per unit

Question 24

what are two things contribution per unit shows?

Answer 24

contribution per unit shows how much each unit:
1 - firstly contributes to paying fixed costs
2 - after fixed costs have been covered any additional funds contributes to a firm’s profits

Question 25

what is the formula for break-even?

Answer 25

fixed costs / contribution per unit

Question 26

where is the break-even point on the graph?

Answer 26

where total costs and total revenue meet

Question 27

define margin of safety

Answer 27

the difference between the break-even point and the level of activity designed to achieve the profit target

Question 28

how to workout profit using contribution of unit?

Answer 28

(quantity sold x contribution per unit) - fixed costs

Question 29

what are the benefits and drawbacks of break-even?

Answer 29

benefits -
quick and easy to calculate
easy to interpret and understand
can estimate the future level of sales needed to meet given objectives in terms of profits
can be used to forecast the effect of changes to price, fixed and variable costs of both output required to break even and profits
can be used to support applications for bank loans as it helps the banks to see future profitability and levels of output required to cover costs

limitations -
assumes that costs increase gradually and does not take into account factors such as firms benefiting from buying in bulk
assumes a constant selling price, ignoring the use of special offers and discounts
cannot be used for firms selling multiple products with different prices and costs
assumes all output will be sold which is not always true

Question 30

what are three things the effectiveness of break-even depends on?

Answer 30

the accuracy of the data -
Poor-quality data can result in inaccurate conclusions being drawn

the size and type of firm completing the break-even analysis

in the short term, it’s useful for varying markets and small-scale operations and it’s a good starting point
in the long run, it is too simplified and does not possess the realities of business life to have a major impact on decisions

Question 31

how is break-even analysis useful to shareholders?

Answer 31

potential investors and shareholders will be interested to see how many units must be sold before a profit is made

Question 32

how is break-even analysis useful to customers?

Answer 32

if it takes time to break even then a business may decide to increase the selling price which can affect the price and demand customers have to pay

if it takes time to break even and the product is therefore not viable then the business may withdraw the product from the market which can affect existing loyal customers

a business may decide not to market a product that takes long to break even, impacting consumer choice

Question 33

how is break-even analysis useful to employees?

Answer 33

if the product is withdrawn from the market as it’s not viable then this could impact employee motivation/lead to job losses

Question 34

how is break-even analysis useful to the bank?

Answer 34

in order to give a loan to the business the bank requires financial evidence of potential sales and will need to see the break-even data of the business