Unit 4.2 - revenue and costs

Question 1

What’s the revenue formula?

Answer 1

Selling price x number of goods sold

Question 2

Define fixed costs.

Answer 2

Costs that do not change with output

Question 3

Define variable costs.

Answer 3

Costs that change with output

Question 4

What’s the variable cost formula?

Answer 4

Variable cost x number of goods produced

Question 5

What’s the total cost formula?

Answer 5

Fixed costs + variable costs

Question 6

Define total cost.

Answer 6

The full amount spent by a business on producing the goods and services

Question 7

Define profit.

Answer 7

The amount earned from business activity

Question 8

What’s the profit formula?

Answer 8

Total revenue - total costs

Question 9

Define loss.

Answer 9

A loss is when a business spends more than they earn. Total costs is bigger than total revenue

Question 10

Define break even.

Answer 10

The level of production at which a business’s total costs and total revenue from sales are equal
The point when profit = 0

Question 11

Define break even chart.

Answer 11

Shows a business’s costs and revenues and the level of production needed to break even

Question 12

What’s the contribution calculation?

Answer 12

Selling price - variable costs

Question 13

What’s the break even formula?

Answer 13

Fixed costs/contribution

Question 14

What’s the formula for contribution per unit?

Answer 14

Selling price - variable costs/number of units produced

Question 15

How can the break even point decrease? (3)

Answer 15

Increase in price
Fall in fixed costs
Fall in variable costs

Question 16

Name the advantages (2) and disadvantages (2) of break even.

Answer 16

Helps businesses to decide whether it is worthwhile to provide a good or service
It guides businesses when making decisions, such as whether to increase price or on issues to do with costs
It can be difficult to estimate the contribution certain costs make to the cost of producing an individual good - particularly when the business produces a variety of products
It assumes that price is constant but, in a competitive market, prices may change

Question 17

Define margin of safety.

Answer 17

The difference between actual output and break even point

Question 18

Define average rate of return (ARR).

Answer 18

Compares the average yearly profit from an investment with the cost of the investment and is stated as a percentage

Question 19

What’s the ARR formula?