Business Revenues, Costs & Profits Flashcards
All 30 cards in this deck
What is revenue?
The income earned by a business over a period of time from selling its goods or services.
What is the formula for revenue?
Revenue = selling price per unit quantity sold.
What are fixed costs?
Expenses a business must pay that do not change with output, e.g. rent.
What are variable costs?
Expenses that change directly with output, e.g. raw materials.
Give two examples of a variable cost.
Raw materials and packaging.
Give three examples of a fixed cost.
Rent, insurance, advertising (salaries are also accepted).
What is the formula for total costs?
Total costs = fixed costs + variable costs.
Give one way a small business could reduce its variable costs.
Find a cheaper supplier, or buy raw materials in bulk to get a discount.
What is the formula for profit?
Profit = total revenue − total costs.
When does a business make a loss?
When total costs are greater than total revenue.
What is interest?
The cost of borrowing money (or the reward for saving it), charged as a percentage of the amount.
What is the formula for the interest rate as a percentage?
Interest on a loan (%) = (total repayment − amount borrowed) ÷ amount borrowed × 100.
What is the break-even point?
The number of products a business must sell so that revenue and total costs are equal — neither profit nor loss is made.
What is the formula for the break-even level of output?
Break-even output = fixed costs ÷ (selling price per unit − variable cost per unit).
What should a business do if the break-even calculation gives a decimal answer?
Round up — it must sell an additional whole unit to break even.
What is the margin of safety?
The amount by which sales can fall before the break-even point is reached.
What is the formula for margin of safety?
Margin of safety = actual sales − break-even level of output.
On a break-even diagram, where is the break-even point found?
Where the revenue line crosses the total costs line.
Why is the fixed costs line on a break-even diagram horizontal?
Because fixed costs do not change as output changes.
On a break-even diagram, how are profit and loss shown?
Profit is the area between the revenue and total cost lines to the right of break-even; loss is that area to the left.
What happens to the break-even level of output if costs increase?
It rises — the business must sell more units to cover its costs, and profit falls.
What effect does reducing costs have on break-even and on profit per unit?
Fewer units need to be sold to break even, and profit per unit rises if the selling price stays the same.
Which two of these can be read from a break-even diagram: insolvency, margin of safety, market share, net cash flow, profit?
Margin of safety and profit.
True or false? Revenue and profit mean the same thing.
False. Revenue is all income from sales; profit is what is left after total costs are deducted.
What is the formula for the break-even point in revenue (or costs)?
Break-even point in costs/revenue = break-even point in units × sales price.
What is the formula for total variable costs?
Total variable costs = variable cost per unit × quantity produced.
On a break-even diagram, how is the margin of safety shown?
As the distance along the output axis between the break-even output and the actual (or planned) level of output.
What happens to the break-even level of output if the selling price is increased?
It falls, because each unit sold covers more of the fixed costs. However, a higher price may put customers off, so sales could fall.
Give one limitation of break-even analysis.
Any one of: it assumes every unit produced is sold; it assumes price and costs stay the same; it is only as accurate as the forecast figures used.
On a break-even diagram, where does the total costs line start, and why?
At the level of fixed costs on the vertical axis, because fixed costs must be paid even when nothing is produced.