Business revenue and costs

Flashcards covering revenue, costs (fixed, variable, direct, overheads, semi-variable), profit and contribution concepts, break-even analysis (definition, advantages, limitations), and the margin of safety as presented in the notes.

What is total revenue and what is its formula?

Total revenue is the money a business receives from its sales; TR = quantity sold × selling price.

What are fixed costs and give examples?

Fixed costs do not vary with output such as rent and management salaries.

What are variable costs and give examples?

Variable costs vary in direct proportion to changes in output such as raw materials, fuel, and labour paid for what is produced.

What are semi-variable costs?

Costs that contain both fixed and variable elements, such as telephone charges with a fixed standing charge plus a variable rate based on usage.

What is total costs?

Total costs equal fixed costs plus variable costs.

What is profit? (General definition)

Profit is the difference between total revenue and total costs; it shows how much is left after costs are covered.

In the given example, what is profit at maximum capacity?

£2,840,000.

What is contribution?

Contribution is the amount from revenue left after variable costs to pay fixed costs; after fixed costs are covered, any remaining contribution becomes profit.

What is the formula for contribution per unit?

Contribution per unit = Selling price per unit − Variable costs per unit.

What are direct costs?

Costs arising specifically from the production of a product or the provision of a service

What are overheads/indirect costs?

Costs not directly related to production (e.g., secretary or receptionist, advertising); true profitability requires allocating overheads to products.

What is Break-even analysis?

A diagram showing the level of output where a business does not make a profit nor a loss (i.e., total revenue equals total costs).

What are the advantages of break-even analysis?

Easy visual and quick; cheap to construct; profit/loss can be seen at a glance; useful for ‘what-if’ decisions; helpful for gaining finance; aids target setting and identifies the margin of safety.

What are the limitations of break-even analysis?

Assumes all output is sold; conditions may change (wages, prices, technology); data may be inaccurate; assumes linear revenue and cost curves; allocating fixed costs in multi-product businesses can be problematic; fixed costs are often stepped.

What is the Margin of Safety?

The margin of safety shows how much output can be reduced before the business starts to make a loss.

What is the Margin of Safety calculation?

Margin of safety = Selected level of business activity − Break-even point.

Example: Margin of safety in hampers

Margin of safety = 600 − 200 = 400 hampers.