1.6.1 Revenue and Costs and 1.6.2 Their relationship Flashcards

1
Q

what is sales volume and total revenue

A
• Sales volume: this is the number of items sold over a period of time
• Total revenue/sales revenue: this is the value of the business
2
Q

calculations for salves volume and total rev

A

Sales revenue - price x quantity sold

Average cost = total cost quantity sold

Total cost = fixed costs + variable costs

Profit = total revenue - total cost

3
Q

A
• Total costs: all the costs involved in producing a good or service
• Total fixed costs: costs that do not change with output (rent, business rates, managers salaries)
• Total Variable costs: costs do change with output (material costs, energy bills, wage costs)
• Average fixed costs = total fixed costs output
• Average variable costs = total variable costs output
4
Q

direct and indirect costs

A
• Variable cost are sometimes called direct costs, as they are directly associated with output.
• fixed costs are sometimes called indirect costs, as they are not directly related to output
5
Q

assumptions made when calculating profit/loss change + how to estimate this

A

To estimate sales → market research

Assumptions when calculating change in profit/loss:
- Fixed cost are fixed
- Costs per unit for VC are the same (flour is the same price etc)

6
Q

percentage change

A
• Percentage change: the amount of change in a variable expressed as a percentage of the original amount of that variable

Change - original
——————— x 100
Original

7
Q

contribution

A

Contribution is the difference between the price of a product and its variable cost P - VC

• Every time a product is sold, the contribution from its sale can be used to pay off the fixed costs of the business
• Once the break point is reached, the contribution from the next sale begins to create profit

Contribution per unit = costs per unit - VC per unit

8
Q

break even point

A
• The break even point is the level of output at which the total revenue is exactly the same as the total costs → neither a profit or a loss is being made
• When output is above the break-even point the business will start to make profit TR>TC
• When output is below the break-even point the business will start to make a loss TR<TC
9
Q

assumptions when doing break even analysis

A
1. All other variables remain constant
2. A single product is produced
3. Costs can be divided into fixed and variable elements
4. There is a linear relationship between output and total costs (variable costs per unit remain unchanged)
5. There is a linear relationship between output and sales revenue (each unit is sold at the same price)
6. All output can be sold at the given price
7. The analysis applies to the relevant range only
8. All stock is actually sold
10
Q

explain the break even graph

A
• Fixed costs are shown on a horizontal line
• Variable costs are added to fixed costs
• Total costs start part way up the vertical axis, as there are fixed costs + variable costs
• Total sales revenue starts from the origin and rise in the form of a straight line
• Break even occurs at the intersection of total costs and total revenue
• We can read off both the break even quantity and break even revenue on the horizontal and vertical axis
• The gap between current output and sales and break even is known as the margin of safety
• The red triangle shows LOSS and the blue triangle shows PROFIT

** for BEP always round UP
** for BEP always use the name of the product (15,000 scarves)

11
Q

contribution and the break even point

A

Break even point = total fixed costs
———————
Contribution (P-AVC)

• If costs go down, your likely to make a profit sooner because the BEP is lower
12
Q

margin of safety

significance

A
• The margin of safety is the difference between the acual level of output and the break even level of output
• It shows how low sales can fall before the business starts to make a loss
• A higher margin of safety puts the business in a better position
• This will help clarify the risks and precautions that may need to be in place
• Eg better advertising strategies, or perhaps more freezer capacity
• Profit = margin of safety x contribution per unit
13
Q

what is break even analysis

A
• Break even analysis means looking at the break point and seeing if a business venture will be feasible
• Different prices and costs can be considered to see how BEP changes, profit levels can be worked out over a range of output levels
• BEP will be a key element in a business plan if a business is trying to raise finance
14
Q

strengths of BEP

A
• Helps to assess the strength of a business idea and whether it is worthwhile or not (planning)
• Helps to assess the levels of output needed to make a profit
• Shows the impact of changes in price and/or costs on the BEP and any profit levels
• Enables the calculation of profit/loss over different levels of output
• Helps support an application for finance
• Can be used in new product development to estimate sales needed to break even on a product
• Measures profits at different levels of sales
• Can identify the impact of price/cost changes
15
Q

weakness of BEP

A
• The model assumes that costs rise steadily, but they may not → bulk buying can reduce cost per unit
• The model assumes that all output is sold, in reality this may not happen
• It is only a forecast and estimates of costs and price levels may be unrealistic
• Knowing what BEP ins doesnt mean you will actually sell all the stock manufactured
• Markets are dynamic so if estimates are correct something can happen to spoil things (competitions, economic recession etc)
• Does not take into account economies of scale and bulk buying
• Static model that needs to be reworked whenever one of the variables changes