business revenue and costs

• definition of sales revenue/turnover ?

  Revenue is the money a business makes from sales.The total amount of money a business receives from its sales is called total revenue.
• total revenue

  Total revenue = quantity sold x selling price
• what is fixed costs ?

  Do not vary with output. Fixed costs only change in the long run; for example: rent, management salaries, interest charges, depreciation.
• what is variable costs ?

  Costs: Costs which vary in direct proportion to changes in output; for example: raw materials, fuel and labour (when staff are paid for what they produce).
• what is semi variable costs

  Costs which contain both fixed and variable elements, such as telephone charges where there is a fixed standing charge plus an extra rate which varies according to the number of calls made.
• profit

  profit = Total Revenue – Total Costs
• what are direct costs ?

  costs that arise specifically from the production of a product or the provision of a service.

  Examples of direct costs include:

  • rent on a shop
  • materials or components
  • direct labour
  • expenses such as copyright payments on a published book
  • licence fees for use of patents

  These direct costs can be totalled to give the direct costs of producing the product. However, revenue minus direct costs does not indicate profitability. The business must also apportion overheads or indirect costs to the product.
• what is contribution ?

  Definition: It is the difference between the income generated from sales and the variable costs of producing the goods to generate those sales. This allows an organisation to analyse whether each of its products covers its own variable costs.

  • Contribution is used to pay the company’s overheads (fixed costs). Once these have been covered, additional contribution generates profit.
• contribution per unit?

  Contribution per unit =

  Selling Price per unit – Variable Costs per unit
• what are overheads / indirect costs ?

  costs not directly related to production.

  Examples of overheads costs include:

  • employing the secretary or receptionist staff
  • advertising costs

  The true profitability of a product, factory, outlet etc.

  can only be judged if we take from revenue both direct

  costs and overheads.
• what is the definition of break even

  a diagram which shows the level of output where a business does not make a profit nor a loss
• what is the break even equation ?

  fixed costs /( selling price - variable cost per unit )
• What is a key advantage of break-even graphs?

  They provide a visual analysis of financial position
• How do break-even graphs assist in profitability assessment?

  They offer a rule-of-thumb guide to profitability
• What is a benefit of constructing break-even graphs?

  They are cheap and quick to construct
• What advantage do break-even graphs provide for non-financial specialists?

  They allow profit and loss situations to be seen easily
• How can break-even graphs be useful in decision-making?

  They help in 'what if' scenarios regarding revenues and costs
• In what context can break-even analysis be beneficial for businesses?

  It can help in gaining finance for a business plan
• What does break-even analysis simplify in business operations?

  Target setting for financial goals
• What does break-even analysis identify that aids in planning?

  The margin of safety for financial decisions
• Why is break-even analysis often regarded as too simplistic?

  It relies on unrealistic assumptions
• What does break-even analysis assume about output?

  All output is sold
• What is a limitation of break-even analysis regarding market conditions?

  It assumes conditions remain unchanged
• What factors can change suddenly, affecting break-even analysis assumptions?

  Wages, prices, and technology
• What does break-even analysis rely on for accuracy?

  Accurate data
• What is a common issue with data used in break-even analysis?

  Under or over estimations are made
• What assumption does break-even analysis make about revenue and cost curves?

  They are always linear
• Why can allocating fixed costs in a multi-product firm be problematic?

  It makes break-even analysis output inaccurate
• What is a characteristic of fixed costs that complicates break-even analysis?

  They are often stepped
• What are the main limitations of break-even analysis?

  • Too simplistic due to unrealistic assumptions
  • Assumes all output is sold
  • Assumes conditions remain unchanged
  • Relies on accurate data
  • Assumes linear revenue and cost curves
  • Problems in allocating fixed costs in multi-product firms
  • Fixed costs are often stepped
• definition of margin of safety ?

  The Margin of Safety shows how much a producer can reduce output before the business starts to make a loss.

  Selected level of business activity – Break-even Point