5.3 Revenue, Costs, Profits and loss Flashcards
(112 cards)
1
Q
What is the definition of revenue in business?
A
The money received from sales.
Revenue is crucial for covering costs and determining profits.
2
Q
What is the formula for calculating total revenue?
A
Total revenue is the sum of money a business earns from all the sales it makes.
Total revenue is a key indicator of a business’s financial performance.
3
Q
Why is revenue important for businesses?
A
It pays for costs, measures success, and determines profits.
Revenue is essential for sustaining operations and growth.
4
Q
List three ways a business can increase its revenue.
A
- Increase the price of the product
- Reduce the price to increase sales
- Increase sales through advertising or expanding product range
Revenue strategies may vary based on market conditions and competition.
5
Q
True or False: A business may choose not to maximize revenue.
A
True.
Reasons may include avoiding control sharing or targeting a niche market.
6
Q
What is the cost of sales?
A
The cost of buying in the goods the business sells, or of producing goods.
Understanding the cost of sales is crucial for calculating profits.
7
Q
Fill in the blank: Revenue influences business decision-making by affecting _______.
A
profits.
Decisions related to pricing, marketing, and production are influenced by revenue.
8
Q
What might motivate a business to reduce its prices?
A
To increase sales, especially if there are many competitors.
Price reduction can attract more customers in a competitive market.
9
Q
What is one reason a business might want to sell to a niche market?
A
To charge a high price and make their product exclusive.
Niche marketing can lead to higher profit margins.
10
Q
What are two potential benefits of increasing advertising?
A
- Targeting the right audience
- Sending the right message
Effective advertising can significantly boost sales and revenue.
11
Q
What is one potential consequence of increasing product prices?
A
Customers may switch to a cheaper competitor.
Price elasticity of demand plays a critical role in this decision.
12
Q
What is the formula for sales revenue?
A
Sales revenue= Quantity sold x Selling price
13
Q
What are variable costs?
A
Costs that change as output changes, for example, wage and material costs will increase if more products are made or sold.
14
Q
What is the definition of total costs?
A
The addition of total fixed and total variable costs.
15
Q
What are fixed costs?
A
Costs that stay the same regardless of a change in output, for example, rent for offices, shops, factories or land, interest rates and the uniform business tax.
16
Q
Fill in the blank: Total costs are the addition of total _______ and total variable costs.
A
[fixed costs]
17
Q
True or False: Fixed costs change with the level of output.
A
False
18
Q
Name two examples of variable costs.
A
- Wage costs
- Material costs
19
Q
What remains constant regardless of the level of output?
A
Fixed costs
20
Q
Fill in the blank: An example of a fixed cost is _______.
A
[rent for offices]
21
Q
What type of costs will increase if more products are made or sold?
A
Variable costs
22
Q
List three examples of fixed costs.
A
- Rent for offices
- Interest rates
- Uniform business tax
23
Q
What is the total cost when total fixed cost is £12,000 and total variable cost is £22,000?
A
£34,000
24
Q
What are the two main factors that determine how much profit a business will make?
A
Costs and revenue
25
List three reasons why a business may want to minimize its costs.
* Increase profits
* Reduce prices to become more competitive without cutting profits
* Save money in order to expand or to update machinery
26
Name two methods by which costs may be reduced.
* Employing new technology instead of workers
* Finding cheaper supplies of materials or goods to sell
27
True or False: A business may need to reduce costs even if it makes a high-quality product.
False
28
Fill in the blank: A business may ask a _______ to reduce its prices to help minimize costs.
supplier
29
What might happen if workers are asked to take a pay cut?
They may agree if they could lose their jobs
30
What is a potential downside of employing new technology instead of workers?
Costs in making workers redundant
31
Why might a business not need to minimize its costs?
It makes a high-quality product and customers are willing to pay a high price or it has no competitors
32
How do you calculate revenue?
Revenue= price x quantity
33
What is a loss in a business context?
When the costs of a business are greater than the revenue it makes.
34
Define gross profit.
Sales minus the cost of sales.
35
What does 'sales' refer to in the context of gross profit?
Sales income, which is the same as total revenue.
36
What is net profit?
Gross profit minus the expenses of operating the business.
37
Define cost of sales.
The cost to the business of producing goods to sell.
38
What are examples of cost of sales?
* Buying stock to sell
* Buying materials
* Employing workers to make a product
39
What are expenses in a business?
The costs of operating the business.
40
List some common expenses a business might incur.
* Wages and salaries
* Rent or mortgage payments
* Insurance
* Heating and lighting
* Advertising
41
What are fixed costs (FC)?
Money spent on items that are needed no matter how many goods or services a business sells
## Footnote
Fixed costs do not change with output.
42
Give examples of fixed costs.
* Rent
* Business rates
* Advertising bills
* Heating bills
* Wages
## Footnote
Fixed costs remain constant regardless of the level of goods or services produced.
43
What are variable costs (VC)?
Money spent on items that are directly linked to the number of items made and sold
## Footnote
Variable costs do change with output.
44
What is the formula for total variable cost?
Total variable cost = Quantity produced * variable cost per unit
## Footnote
This formula calculates the total costs associated with producing a certain quantity of goods.
45
What is the relationship between costs and decision making in a business?
Costs must be managed carefully to ensure profits do not fall
## Footnote
High costs mean more sales must be made to cover these costs.
46
What are some strategies a business can use to reduce costs?
* Lower cost location
* Reduced hours/redundancies/automation for wages
* Research/shop around for insurance
* Store closures
* Cheaper materials for variable costs
* Economies of scale for bulk buying discounts
## Footnote
These strategies can help businesses maintain profitability.
47
What is the formula for total costs?
Total cost = Total fixed costs + Total variable costs
## Footnote
This formula provides a comprehensive view of all costs incurred by a business.
48
Fill in the blank: Total variable cost is calculated by multiplying _______ by variable cost per unit.
[Quantity produced]
## Footnote
Understanding this formula helps in analyzing production costs.
49
True or False: Fixed costs change with the level of output.
False
## Footnote
Fixed costs remain constant regardless of production levels.
50
What is Gross Profit?
The profit made as a result of buying and selling goods and services, but without paying for any expenses incurred in running the business.
51
What is the formula for Gross Profit?
Gross Profit = Revenue - Cost of Sales
52
Provide an example calculation for Gross Profit.
Buy chocolate per 130, sell per 160, GP = 160 - 130 = 30
53
What is Net Profit?
The profit made as a result of buying and selling goods and services, taking into account expenses incurred in running the business.
54
What is the formula for Net Profit?
Net Profit = Gross Profit - Total Costs of Running the Business
55
Provide an example calculation for Net Profit.
Buy chocolate per 130, sell per 150, GP is 120, wages is 110: 120 - 110 = 10
56
What are Profitability Ratios?
Calculations that use financial data to measure the performance of a business.
57
What is the formula for Gross Profit Margin?
Gross Profit Margin = (Gross Profit / Sales Revenue) × 100
58
What is the formula for Net Profit Margin?
Net Profit Margin = (Net Profit / Sales Revenue) × 100
59
Provide an example calculation for Net Profit Margin.
If Net Profit is 20 and Sales Revenue is 100, Net Profit Margin = (20 / 100) × 100 = 20%
60
What can large increasing profits lead to?
• Purchase of new equipment and buildings
• Takeover of other businesses
• Increased dividends being paid
• More development of new products and services
61
What can falling profits or losses lead to?
• Postpone purchase of new equipment and buildings
• Being taken over by another business
• Reduced or no dividends being paid
• Less development of new products and services
62
True or False: Falling profits can result in customers switching to competitors.
True
63
What do gross and net profit margins indicate?
They give a better indication of how well a business is performing
## Footnote
Gross and net profit margins help identify areas for performance improvement and necessary actions.
64
What performance improvement is indicated by a rising gross profit margin?
Gross profit margin rises
## Footnote
Example: 2018 = 57.1%, 2017 = 44%
65
What performance improvement is indicated by a rising net profit margin?
Net profit margin rises
## Footnote
Example: 2018 = 22.8%, 2017 = 18%
66
List three reasons for improvement in gross profit margin.
* Total revenue rose faster than cost of sales
* Total revenue fell but cost of sales fell more
* Total revenue rose and cost of sales fell
## Footnote
These factors indicate a more favorable financial situation.
67
List three reasons for improvement in net profit margin.
* Gross profit rose faster than expenses
* Gross profit has fallen but expenses fell more
* Gross profit rose and expenses fell
## Footnote
These scenarios reflect better control over costs relative to revenue.
68
What performance issue is indicated by a falling gross profit margin?
Gross profit margin falls
## Footnote
Example: 2018 = 57.1%, 2017 = 64%
69
What performance issue is indicated by a falling net profit margin?
Net profit margin falls
## Footnote
Example: 2018 = 22.8%, 2017 = 14%
70
List three reasons for worsening performance in gross profit margin.
* A fall in total revenue and a rise in the cost of sales
* A rise in total revenue but a bigger rise in cost of sales
* A fall in total revenue but a smaller fall in cost of sales
## Footnote
These factors indicate challenges in managing sales and costs.
71
List three reasons for worsening performance in net profit margin.
* A fall in gross profit and a rise in expenses
* A rise in gross profit but a bigger rise in expenses
* A fall in gross profit but a smaller fall in expenses
## Footnote
These scenarios suggest increased costs relative to profit.
72
What is one possible action to improve total revenue?
Increase total revenue by better marketing
## Footnote
Strategies may include raising prices, reducing prices, or expanding into new markets.
73
Fill in the blank: A business may compare its gross and net profit margins against _______ to assess performance.
[other similar businesses]
## Footnote
This comparison helps determine if further action is needed.
74
List two actions to reduce expenses.
* Reducing the wage bill
* Increasing advertising
## Footnote
Other strategies may include cutting hours, replacing labor with machines, or saving on utilities.
75
List two actions to reduce the cost of sales.
* Negotiate a lower price from suppliers
* Buy from cheaper suppliers
## Footnote
These actions can help improve profit margins.
76
What is the purpose of gross and net profit margins?
They provide a better indication of how well a business is performing and identify areas for improvement.
77
What does a rising gross profit margin indicate?
It indicates improving performance.
78
What were the gross profit margins for 2017 and 2018?
2017 = 44%, 2018 = 57.1%
79
What were the net profit margins for 2017 and 2018?
2017 = 18%, 2018 = 22.8%
80
List one reason for an improvement in gross profit margin.
* Total revenue rose faster than cost of sales.
* Total revenue fell but cost of sales fell more.
* Total revenue rose and cost of sales fell.
81
List one reason for a worsening gross profit margin.
* A fall in total revenue and a rise in the cost of sales.
* A rise in total revenue but a bigger rise in cost of sales.
82
True or False: A rise in net profit margin indicates worsening performance.
False.
83
What action can a business take to improve its gross profit margin?
Increase total revenue by better marketing.
84
Fill in the blank: A fall in net profit margin can result from a fall in gross profit and a rise in _______.
[expenses]
85
What is one possible action to reduce expenses?
Reduce the wage bill by reducing hours.
86
What is the significance of comparing gross and net profit margins against similar businesses?
It helps determine if a business is performing well enough.
87
What can cause a net profit margin to rise?
Gross profit rose faster than expenses.
88
List two ways to reduce the cost of sales.
* Negotiate a lower price from suppliers.
* Buy from cheaper suppliers.
89
What does ARR stand for?
Average Rate of Return
90
What is the purpose of calculating the Average Rate of Return (ARR)?
To judge whether investment in the business by its owners is worthwhile
91
ARR is based on the expected profit the investment will make compared with what?
The cost of the investment
92
How many stages are there in the calculation of ARR?
Three stages
93
What is the formula to calculate total profit from the investment?
Total revenue (from the investment) - Cost of the investment
94
How do you calculate the annual average profit per year?
Total profit / Life of the investment (years)
95
What formula is used to calculate the ARR?
Annual average profit / Cost of investment × 100
96
In the example given, what is the cost of the investment?
£300,000
97
What is the total profit in the example provided?
£270,000
98
What is the annual average profit in the example?
£90,000
99
What is the calculated ARR in the example?
30%
100
Fill in the blank: ARR is a method of measuring and comparing the _______ of an investment.
profitability
101
True or False: The ARR calculation is a retrospective measure of investment performance.
False
102
What is the formula to calculate overall profit?
Total income - total cost
103
What is the first step in calculating ARR?
Calculate overall profit
104
What is the second step in calculating ARR?
Calculate average annual profit
105
What is the third step in calculating ARR?
Calculate ARR using Annual average profit × 100 / Initial cost of investment
106
What does ARR stand for?
Average Rate of Return
107
True or False: ARR is useful when comparing different investments.
True
108
What should a business consider when evaluating investments?
What else it might do with its money
109
Fill in the blank: If a business can get a return of 4% from an investment, or a _______ rate of interest from the bank.
3%
110
What may be seen as more favorable than investing in a business?
Leaving money in the bank
111
What must be taken into account when interpreting ARR results?
That ARR is based on expected future outcomes
112
What caution should be noted regarding ARR?
Many things can change and events may not turn out as planned
