R1 Terms

Fixed Costs

Business costs that are not dependent on the amount of goods or services produced by the business, such as rent and management team salaries.

Variable Costs

Business costs that change proportionately to the amount of goods and services produced by a business- for example, raw material costs.

Variable

Unless otherwise stated in the question, Cost of Goods Sold are assumed to be ________ costs.

Fixed

Unless otherwise stated in the question, Operating Expenses are assumed to be ________ costs.

Revenue

Also known as s ales, this is the total amount of money received by a business for providing goods and services. For example, for a car manufacturer, this would be the number of cars sold multiplied by average price per car.

Operating Expenses

Costs incurred by a business that are not directly linked to production of a company's goods and services. For a car manufacturer, these could include marketing costs, salaries for non-factory employees, and rental of office space.

Operating Profit

Gross Profit less Operating Expenses. Unless otherwise stated, profit in the Online Case Experience refers to ______________ _______.

Net Profit

Operating Profit less non-operating expenses such as Interest and Tax. This concept is less often used in the Online Case Experience and will be further explained in the question if necessary.

Substitute Goods

Products which can be used for the same or similar purposes and therefore substitute one another (e.g., skim milk and semi-skim milk).

Complementary Goods

Products which tend to be consumed together (e.g., an iPhone and mobile applications). Thus, increasing demand for one tends to increase demand for the other.

Gross Profit

Revenue less Cost of Goods Sold (variable costs).

Cost of Goods Sold (COGS)

The direct costs involved in producing a product or providing a service - for example, the cost of raw materials and factory labor needed to produce a car.

M&A Synergies

The potential financial benefit of combining two companies in a merger or acquisition. These may include revenue synergies such as the potential to cross-sell each others' products, thus increasing sales overall. They may also include cost synergies such as the potential to streamline duplicated management and administrative functions.

Expected Profit

The profit that a business expects to make, weighted by the probability of all potential profit outcomes. For example, if there is a 60% chance that a business will make $100,000 on a deal, and 40% chance that it will lose $50,000, then the expected profit on the deal is 60% x $100,000 + 40% x (-$50,000) = $40,000.

Stand-alone Value

The value of a company in a merger or acquisition, before taking into account the value of any synergies between the acquiring company and the target company.

Variable Cost Per Unit

_______ ____ ___ ____ equals total variable costs divided by units sold.