Unit 3.2 : Costs and Revenues

Question 1

Cost

Answer 1

1. costs refer to the sum of money incurred by a business in the production process
2. e.g. the costs of raw materials, wages, insurance, advertising, rent, etc

Question 2

Price

Answer 2

amount of money paid by the customer for a good or service

Question 3

Types of costs

Answer 3

1. Fixed costs
2. Variable costs
3. Semi-variable costs
4. Direct costs
5. Indirect costs

Question 4

Fixed costs

Answer 4

1. Fixed costs are the costs of production that a business has to pay regardless of how much it produces or sells
2. It does not vary with the amount of output a business has and have to be paid even if there is no output
3. e.g. rent, interest payments on bank loans, market research, salaries
4. If fixed costs do change, it happens independently from the level of output (e.g. a landowner raising rents)

Question 5

Variable costs

Answer 5

1. Variable costs are the cost of production that change in proportion with the level of output or sales
2. As output increases, so would the variable costs
3. e.g. raw materials such as textiles or paper, wages, or packaging costs
4. In theory, if there is no production/output then the value of variable costs should be 0

Question 6

Total costs

Answer 6

Total costs = Total variable costs + total fixed costs

Question 7

Semi-variable costs

Answer 7

1. Semi-variable costs contain an element of both fixed and variable costs
2. They tend to change (with output levels) only when production or sales exceed a certain level of output
3. e.g. a mobile plan allowing a certain number of “free minute” - after that you have to pay by the minute

Question 8

Direct costs

Answer 8

1. Direct costs is specifically related to an individual project or the output of a particular product
2. These are very similar to variable costs however direct costs are not necessarily related to the level of output and can sometimes be fixed costs (such as consultancy costs or photocopying costs)
3. Direct costs can always be traced back to the output of a product

Question 9

Indirect costs

Answer 9

1. also known as overheads or expenses
2. Costs that cannot be clearly traced to the production or sale of any single product
3. These include rent and lighting costs that are associated with all areas of a business rather than being directly linked to the output or a particular product
4. e.g. advertising, insurance, legal expenses

Question 10

Revenue

Answer 10

1. Sales revenue = price * quantity sold

2. Refers to the money coming into a business, usually from the sale of goods and services (known as sales revenue)

Question 11

Average Revenue

Answer 11

Average revenue = total revenue / quantity

Price = Total Revenue/quantity

Average revenue = price

Question 12

Revenue streams

Answer 12

1. Thought most revenue comes from the sale of goods and services, money can come into a firm from other means, known as revenue streams
2. Refers to the money coming into a business from its various business activities

Question 13

Types of non-sales revenue streams of a business

Answer 13

1. Advertising revenue
2. Transaction fees
3. Franchise costs and royalties
4. Sponsorship revenue
5. Subscription fees
6. Merchandise
7. Dividends
8. Donations
9. Subventions

Question 14

Advertising revenue

Answer 14

1. Advertising revenue is the money that comes in when people pay to have their ads placed on your website/app/etc
2. They can be paid per click or per thousand impressions
3. Companies such as Google and facebook heavily rely on advertising as a revenue stream

Question 15

Transaction fees

Answer 15

1. A transaction fee is a charge that a business has to pay every time it processes a customer’s payment.
2. Common for credit card companies

Question 16

Sponsorship revenue

Answer 16

1. Sponsorship is a form of below the line promotion whereby the sponsor financially supports an organization in return for prominent promotional display of the donor’s brand trademark

Question 17

Subscription fees

Answer 17

1. A form of revenue stream where charges are imposed on customers who use a good or service, based on a formal agreement
2. These include gym memberships, costco/s&r memberships, or netflix memberships
3. They usually charge an annual or monthly fee

Question 18

Merchandise

Answer 18

1. Service providers in the entertainment industry rely on selling merchandise in addition to admission charges
2. Such as cinemas or concerts selling popcorn or souvenirs

Question 19

Dividends

Answer 19

1. Some companies invest in other companies which would make them shareholders and entitled to dividends

Question 20

Subventions

Answer 20

1. There are subsidies offered from the government to certain business to help reduce their costs of production
2. They are usually given to organizations that generate benefits to society such as private schools and hospitals