revenue, costs and break even analysis

• What is revenue in a business context?


  Revenue is the money a business makes from sales, also referred to as turnover.
• How is total revenue calculated?

  Total revenue is calculated as quantity sold multiplied by selling price.
• What formula is used to determine profit?

  Profit is calculated as total revenue minus total costs.
• What happens if total costs exceed total revenue?

  If total costs exceed total revenue, the business will incur a loss.
• What are fixed costs?


  Fixed costs are costs that remain the same regardless of the level of output produced.
• Give an example of a fixed cost for a shop.

  An example of a fixed cost for a shop is rent or mortgage payments.
• How do variable costs behave in relation to output?

  Variable costs vary in direct proportion to output; they increase as output increases and decrease as output decreases.
• What are semi-variable costs?


  Semi-variable costs are costs that can be classified as either fixed or variable depending on the situation.
• How are total costs calculated?

  Total costs are calculated by adding fixed costs and variable costs together.
• What happens to average total costs as output increases?


  As output increases, average total costs start to fall until diseconomies of scale occur.
• Why is it important for managers to judge profitability?


  It is important for managers to judge profitability to make informed decisions about production and investments.
• What are direct costs and give examples?

  • Direct costs arise specifically from the production of a product or service.
  • Examples include:
  • Rent on a shop
  • Materials or components
  • Direct labor
  • Expenses like copyright payments or license fees
• What are overheads in a business context?

  • Overheads are costs not directly related to production.
  • Examples include:
  • Salaries of administrative staff
  • Advertising costs
• How do you calculate average total costs?


  Average total costs are calculated by dividing total costs by output.
• What is the break-even point?


  The break-even point is the level of sales at which total revenue equals total costs, resulting in no profit or loss.
• How do you calculate break-even output using the contribution method?

  Break-even output is calculated by dividing fixed costs by the contribution per unit.
• If the selling price is £9 and the variable cost is £5, what is the contribution per unit?

  The contribution per unit is £4.
• How many boxes must the deliveryman sell to break even if his fixed costs are £2000 and contribution is £4 per box?

  The deliveryman must sell 500 boxes to break even.
• What does break-even analysis allow a business to calculate?


  Break-even analysis allows a business to calculate profit or loss at different levels of output.
• If the deliveryman predicts sales of 650 boxes, what will his profit be if the break-even point is 500 boxes?


  The profit will be £600.
• What is the significance of the break-even graph?


  • The break-even graph visually represents costs and revenue.
  • The vertical axis shows the level of costs and revenue.
  • The horizontal axis shows the level of output.
• What is the break-even output in the given case?

  500 boxes per month
• How many boxes does the market research suggest can be sold per month?

  650 boxes
• How do you calculate profit at a sales level of 650 boxes?


  By taking the difference between predicted sales and break-even sales, then multiplying by the contribution
• What is the contribution per box in this scenario?


  £4
• What is the profit made at a sales level of 650 boxes?


  £600
• What does the break-even graph represent?

  • Vertical axis: Level of costs and revenue
  • Horizontal axis: Level of output and sales
  • Fixed costs line: Horizontal at £2000
• What are the fixed costs in this scenario?


  £2000
• How do you determine the variable costs line on the break-even graph?

  By calculating variable costs per unit and marking points on the graph
• What is the variable cost per unit in this case?


  £5
• How do you calculate variable costs at an output level of 400 boxes?

  By multiplying 400 by £5, resulting in £2000
• What are the total costs at an output of 400 boxes?


  £4000
• How is the total cost line drawn on the break-even graph?

  By adding fixed and variable costs at different output levels
• What is the total cost at an output of 1000 boxes?


  £7000
• What does the revenue line on the break-even graph represent?


  • Revenue is calculated as number of sales multiplied by selling price per unit
  • Average sales price in this case is £9
• How do you calculate revenue at a sales level of 600 units?

  By multiplying 600 by £9, resulting in £5400
• What is the break-even point on the graph?


  The point where the revenue line cuts the total costs line
• What does the margin of safety indicate?


  The difference between output level and break-even output
• If output is 900 units and break-even is 500 units, what is the margin of safety?

  400 units
• How can changes in costs and revenues affect profitability?

  • An increase in price raises revenue and lowers break-even output
  • An increase in variable costs raises total costs and increases break-even output
  • Fixed cost changes result in a parallel shift in the total cost line