1.6 revenue , costs, profits and cash

• equation for average revenue

  total revenue / quantity sold
• define marginal revenue and how to calculate

  the extra revenue earned from producing one extra unit of output.

  Calculated by taking the differences of total revenue between different levels of output.
• 2 different types of costs in businesses

  • fixed costs
  • variable costs
• eg of fixed and variable

  fixed - rent

  variable - raw material costs
• contribution

  total profit made by selling each product
• equation for contribution

  selling price - variable costs
• why does the contribution equation exclude fixed costs

  fixed costs don't vary with output
• margin of safety

  difference between actual level of output and the break even level of output
• how does profit act as a signal in markets

  high profit margins incentivise new firms to enter the market
• how does price act as a signal in markets

  signals where resources are most needed in the market
• what is the statement of comprehensive income

  shows the revenues and expenses of a firms
• how will an increase in expenditures change net income

  it reduces net income, because expenditures are cash outflows
• 3 ways a firm measures profitability

  • gross profit margin
  • operating profit margin
  • net profit
• operating profit margin

  the profit earned from the core business operations
• what is a cash flow forecast used for

  used to identify where businesses are spending more than they can afford