Business revenue and costs Flashcards
(18 cards)
What is revenue?
Revenue is the income generated from the sale of goods or services before any costs are deducted.
How do you calculate revenue?
Revenue = Selling Price × Quantity Sold
What is meant by costs in business?
- Costs are the expenses incurred in producing goods or services.
- They are divided into fixed and variable costs.
What are fixed costs? Give examples.
- Fixed costs remain constant regardless of output level.
- Examples: rent, insurance, salaried staff wages.
What are variable costs? Give examples.
- Variable costs change with output.
- Examples: raw materials, wages for hourly workers, packaging.
What are total costs and how are they calculated?
- Total costs are the sum of fixed and variable costs.
- Total Costs = Fixed Costs + Variable Costs
What is contribution?
Contribution is the amount each product contributes toward covering fixed costs and generating profit.
how do you calculate contribution per unit?
Contribution per Unit = Selling Price – Variable Cost per Unit
How is total contribution calculated?
Total Contribution = Contribution per Unit × Number of Units Sold
How is profit calculated using contribution?
Profit = Total Contribution – Fixed Costs
What is break-even output?
The number of units a business must sell to cover all costs (no profit or loss).
How do you calculate break even output?
Break-even Output = Fixed Costs / Contribution per Unit
Why is break-even analysis useful?
- It helps businesses: determine minimum sales needed to avoid losses
- set sales targets
- support decision-making and investment planning.
What are the limitations of break-even analysis?
- Assumes all output is sold
- fixed and variable costs may not be constant
- doesn’t account for changes in market conditions.
What is the margin of safety?
The number of units sold beyond the break-even point.
how do you calculate the margin of safety?
Margin of Safety = Actual Output – Break-even Output
How can understanding revenue and costs aid decision-making?
- It helps managers to: set pricing strategies
- control costs
- forecast profits
- evaluate viability of new products or investments.
What impact does changing selling price have on revenue and break-even point?
- Increasing price may increase revenue but reduce sales
- higher price raises contribution per unit and lowers break-even output
- a lower price does the opposite
