Business revenue and costs

Question 1

What are fixed costs

Answer 1

costs that do not change in regard to output (rent and managers salaries)

Question 2

How are fixed costs shown on a break even chart

Answer 2

As a straight horizontal line

Question 3

What are variable costs

Answer 3

Costs that change in regard to the output produced (raw materials)

Question 4

How are variable costs shown on a break even chart

Answer 4

Start at zero and slope upwards

Question 5

What are semi variable costs

Answer 5

Costs that are partly fixed and partly variable (employees may get a base salary and commission)

Question 6

What are direct costs

Answer 6

Costs that are easily attributable to a unit of output (the amount of sugar weighed out when baking a cake)

Question 7

What are indirect (overhead) costs

Answer 7

All other costs incurred that cannot be directly tied to an individual unit of output (admin costs or heating bills)

Question 8

What are total costs

Answer 8

Fixed costs plus total variable costs

Question 9

How are fixed costs shown on a break even chart

Answer 9

Start at the fixed costs point and slope upwards parallel to the variable cost line

Question 10

What is revenue (include the formula)

Answer 10

The money coming in from the sale of goods and services, revenue = selling price x quantity sold

Question 11

What is breakeven

Answer 11

The point at which a business is not making a profit or a loss, at this point total costs are equal to total revenue

Question 12

What does contribution pay for

Answer 12

Its own variable costs, fixed costs and then profit

Question 13

What is the formula for contribution

Answer 13

Contribution = selling price - variable costs

Question 14

What is the formula for breakeven involving contribution

Answer 14

BE = fixed costs / contribution

Question 15

What is the margin of safety

Answer 15

How much actual output is above the break even level of output

Question 16

What is the formula for margin of safety

Answer 16

Actual output - Break even level of output

Question 17

What are the negatives to break even analysis

Answer 17

Must be treated with caution because it assumes that costs are static when in reality they change

Question 18

In which ways can fixed costs change

Answer 18

Landlord puts rent up, bank changes interest rates, management want a pay increase

Question 19

In which ways can variable costs change

Answer 19

Raw materials change in price, minimum wage is increased, utilities companies change price

Question 20

In which ways can selling price change

Answer 20

New competitors enter the market, positive word of mouth increases demand

Question 21

What are the strengths of break even

Answer 21

Allows for calculation of minimum number of sales needed before starting to make a profit, calculate level of profit at varying levels of output, predict outcome of changing variables, provides a target, include in business plan

Question 22

What are the weaknesses of break even

Answer 22

Based on predictions, ignores varying costs (including fixed over time), does not ensure anything will materialise