Topic Area 3

• What are fixed costs?

  Costs that do not change no matter how many units the business produces or sells
• What are examples of fixed costs?

  -Advertising

  -Insurance

  -Salaries

  -Loan interest

  -Rent

  -Utilities
• What are variable costs?

  Costs that change in line with the level of output
• What are examples of variable costs?

  -Raw materials and components

  -Packaging

  -Wages
• What is the formula to work out total variable costs?

  Variable cost per unit x output
• What are total costs?

  All the fixed costs and variable costs that a business incurs
• What is revenue?

  The amount of money a business receives from selling its products
• What is the equation to find out the Total Revenue?

  Selling price per unit x number sold
• What is profit?

  The amount of money that a business/entrepreneur makes
• What is the equation for profit?

  Total revenue-total costs
• What is a loss?

  When the business's costs are greater than the revenue it makes from sales
• What is a break-even point?

  Total costs=total revenue: neither a profit nor a loss
• What is break-even quantity?

  The number of units that the business has to sell in order to break even
• What is the formula to find out the break-even point?

  Fixed costs

  ---------------------------------

  (selling price per unit-variable cost per unit)
• What do the lines represent on a break-even graph?

  -Fixed costs: straight horizontal line

  -Total costs: Diagonal line starting from the same place as the fixed costs line

  -Total revenue: A diagonal line starting at the origin

  -Break-even point: The section where the total revenue and total costs lines meet
• How does an entrepreneur use break-even information?

  -Make decisions on how many units they need to sell to make a profit

  -Support an application for a bank loan or to get an investment

  -Identify any costs that the business needs to reduce

  -Decide what price to charge for a product
• Where can businesses get cash from?


  . Cash from profit

  . Bank loan

  . Personal savings
• What do businesses spend cash on?

  . Rent

  . Wages

  . Loan/overdraft interest

  . Purchasing equipment
• What is cash?


  The physical money that a business holds in a till or its bank account that is readily available to pay any debts or expenses:

  • A business must always have enough cash
  • The amount of money coming into the business should be greater than the money going out
  • Business must take care with their cash flow as it changes regularly
• Why do businesses need cash?


  Without sufficient cash, a business is unable to:

  • Pay its bills
  • Pay employees' wages/salaries
  • Repay debts and loans
  • Buy materials to make products
• What might happen if a business does not have enough cash?


  . If a business is unable to pay its bills, it will not survive for very long

  . If a business owes money, these other businesses/people might take legal action to force the business to pay the bills. This could result in the business being forced to close