5.3 Revenue, Costs, Profit & Loss Flashcards
All 40 cards in this deck
Give two examples of a fixed cost.
Any two of: rent; insurance; salaries (e.g. managers' pay).
Give two examples of a variable cost.
Any two of: raw materials; packaging; wages of production workers paid per item made; energy used to run machinery.
True or false? A business's fixed costs never change.
False. They don't change with output in the short term, but they rise when a business expands, e.g. when it rents a bigger site.
True or false? If a business's sales revenue has risen, its profit must have risen too.
False. Costs and expenses may have risen faster, so profit can fall even when revenue rises.
What does gross profit margin show a business?
How many pence of gross profit the business makes from each £1 of sales revenue. A higher margin means a bigger share of each sale is left after paying cost of sales.
Why are profit margins better than profit figures for comparing a business with its competitors?
Margins are percentages of revenue, so businesses of different sizes can be compared fairly.
Give one way a business could increase its gross profit margin.
Any one of: raise its selling price; reduce cost of sales, e.g. by finding cheaper suppliers or materials.
Give one way a business could increase its net profit margin without changing its gross profit.
Reduce its expenses (overheads), e.g. move to cheaper premises or spend less on advertising or insurance.
When calculating ARR, how is the average annual profit found?
Average annual profit = total profit from the investment (total returns − cost of investment) ÷ number of years the investment lasts
What does a higher average rate of return (ARR) show?
The investment earns more profit each year compared with what it cost, so it gives a better return than an option with a lower ARR.
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.
What is the formula for total costs?
Total costs = fixed costs + variable costs.
What is the formula for total variable costs?
Total variable costs = variable cost per unit × quantity produced.
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 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.
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 gross profit?
Gross profit = sales revenue − cost of sales
What is the formula for net profit?
Net profit = gross profit − other operating expenses and interest
What is gross profit?
The difference between the money received from selling goods and services and the cost of making or providing them, ignoring fixed costs or overheads.
What is cost of sales?
The costs incurred as a direct result of making a product or providing a service, such as raw materials.
What is net profit?
The profit left after every cost has been taken off: cost of sales, other operating expenses and interest. The business can reinvest it or pay it out to its owners.
What is the formula for percentage change?
Percentage change = ((new value − original value) ÷ original value) × 100
What is the formula for an average (mean) of a set of business figures?
Average = sum of the values ÷ number of values
What is the formula for gross profit margin?
Gross profit margin = (gross profit ÷ sales revenue) × 100
What is the formula for net profit margin?
Net profit margin = (net profit ÷ sales revenue) × 100
True or false? Net profit margin is normally lower than gross profit margin.
True. Net profit margin takes more costs into account (other operating expenses and interest), not just cost of sales.
What does net profit margin show a business?
How many pence of net profit it keeps from each £1 of sales revenue once all its costs, including overheads and interest, have been paid.
What is the average rate of return (ARR)?
The average profit an investment earns each year over its life, shown as a percentage of what the investment cost at the start.
What is the formula for average rate of return (ARR)?
ARR = (average annual profit ÷ cost of investment) × 100
What is average rate of return used for?
Comparing the profitability of different investment choices over the expected life of each investment, and against the interest rate from a bank.
Give one limitation of average rate of return as a way of judging an investment.
Any one of: it ignores when the returns are received (sooner is better); it relies on forecast profits that may be wrong.
Name two factors that can affect a business's revenue.
Any two of: the price of the product; the level of sales; the number and actions of competitors; demand factors such as quality and customer service; the size of the product range.
Give two reasons why profit is important to a business's future.
Any two of: to fund expansion or new equipment; to develop new products; to pay dividends to shareholders; to repay loans; to attract new investors; to avoid the cost of other finance.
True or false? If net profit margin falls from 4.2% to 2.9%, net profit has fallen by 1.3%.
False. The margin has fallen by 1.3 percentage points: each £100 of sales now earns £1.30 less net profit. Net profit itself could still rise if revenue has grown.
Can raising the price of a product increase revenue even though fewer are sold?
Yes, if sales fall by a smaller proportion than the price rises. If too many customers stop buying, revenue falls.
Why must a business with high fixed costs sell a large number of products?
It needs enough sales to cover the fixed costs, which must be paid whatever the output; otherwise it makes a loss.
Gross profit margin stays the same but net profit margin falls. What has happened?
Its other operating expenses and interest have risen as a proportion of revenue, so a bigger share of each £1 of sales goes on running costs.