Workbook 8: Financial Management

• Costs are amounts that a business incurs in order to make goods or provide services
• Demand is the amount of a product that customers are willing and able to buy
• Revenue is the income generated by the sales of the business' goods/services
• Variable costs change as output varies. Examples include raw materials and wages based on hours worked or amount produced
• Fixed costs do not change when output varies. Examples include rent, wages, power and advertising expenditure
• Profit is the reward/return for taking risks and making investments
• The break-even point is the point at which a business makes no losses or profit
• Contribution is the profit made on individual products
• Total revenue = volume sold x average selling price
• Profit = total sales - total costs
• Total costs = total fixed costs + total variable costs
• Contribution per unit = selling price per unit - variable costs per unit
• Breakeven = fixed costs / contribution per unit
• Contribution = total sales - total variable costs (or) contribution per unit x number of units sold
• Margin of safety = sales - breakeven point
• Margin of safety is the difference between sales and the breakeven point
• Reminder:

  1. You don't show vc on a break-even graph, unless asked to.
  2. Tc always starts at the fc line
  3. Total revenue always starts at 0

  A) Total revenue

  B) Total cost

  C) Variable costs

  D) Fixed costs

  E) Break-even point

  F) Profit

  G) Loss
• Semi-fixed costs are costs fixed in the short-term but change once a certain level of output is reached. Examples include admin salaries