Revenue, costs, profit and break-even Flashcards
define revenue
the monetary value of sales made by a business within a period
what is revenue also known as?
income
turnover
sales reciepts
takings
what is the calculation used to calculate the firm’s total revenue?
total revenue = selling price per unit x quantity sold
what are three ways a business can increase revenue and expand on the first two ones?
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
define costs
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
what categories can a firm’s cost be classified?
fixed costs
variable costs
semi-variable costs
define fixed costs and give examples
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
how is fixed costs shown on a graph?
by a flat line on the graph
what is meant by variable costs?
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
what is the formula of calculating total variable costs?
variable costs per unit x quantity sold
how is total variable costs shown on a graph?
as an increasing line which always start at zero
how to workout total costs?
fixed costs + total variable costs
how is total costs shown on a graph?
always start from the fixed costs line
what is meant by semi-variable costs?
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
what is meant by direct and indirect costs?
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
how to calculate profit?
total revenue - total costs
what is the impact of costs, revenue and profit on entrepreneurs/owners/the business?
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
what is the impact of costs, revenue and profit on customers?
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
what is the impact of costs, revenue and profit on employees?
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
what is the impact of costs, revenue and profit on the government?
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
what is the impact of costs, revenue and profit on the bank?
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
define break even
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
how to calculate contribution?
selling price per unit - variable cost per unit
what are two things contribution per unit shows?
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
what is the formula for break-even?
fixed costs / contribution per unit
where is the break-even point on the graph?
where total costs and total revenue meet
define margin of safety
the difference between the break-even point and the level of activity designed to achieve the profit target
how to workout profit using contribution of unit?
(quantity sold x contribution per unit) - fixed costs
what are the benefits and drawbacks of break-even?
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
what are three things the effectiveness of break-even depends on?
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
how is break-even analysis useful to shareholders?
potential investors and shareholders will be interested to see how many units must be sold before a profit is made
how is break-even analysis useful to customers?
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
how is break-even analysis useful to employees?
if the product is withdrawn from the market as it’s not viable then this could impact employee motivation/lead to job losses
how is break-even analysis useful to the bank?
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
