THEME 2.4 - Making Financial Decisions

KEY TERMS

Revenue

The income received from sales. (Price x Quantity sold)

Fixed Costs

Costs that do not change with the level of production such as rent.

Variable Costs

Costs that change directly with the level of production such as buying raw materials.

Total Costs

Fixed Costs + Variable Costs

(remember to multiply Variable costs by amount you're producing!)

Breakeven Output

The level of output where total revenues = total costs. No profit and no loss is made at this point.

Gross Profit

Sales revenue − cost of sales

Cost of sales are the variable costs. Gross profit doesn't take into account fixed costs.

Net Profit

(Sales revenue - Total Costs) or (Gross Profit - Fixed Costs)

This profit accounts for all the costs.

Gross Profit Margin

Gross profit x 100

Sales Revenue

(Gross profit / Sales Revenue) x 100

Net Profit Margin

Net profit x 100

Sales Revenue

(Net profit / Sales Revenue) x 100

ARR

Average Annual Profit x 100

Investment Cost

(Add all the profits together and divide by the number of years, then use the formula)