2.2.2 sales revenue and costs
define variable costs
Costs which vary directly with the level of output e.g. raw materials, packaging, wages
what is the BEP
Is the point where the firm's costs are covered.
define profit
The money a business has left over after of its expenses have been paid.
formula for total variable costs
variable cost per unit x quantity
Formula for sales revenue?
price x quantity
define total costs
the sum of fixed and variable costs
two ways firms can increase their revenue
Increasing their price (more profit per unit / demand falls) Decreasing their price (less profit per unit/more demand)
contribution formula
Selling price - variable cost per unit
Limitations of break-even analysis
The selling price per unit is constant and does not change with quantity produced o The variable cost per unit is the same o Fixed costs do not change with output o Everything produced is sold However, these assumptions are not always true in reality, which limits the accuracy of break-even analysis.
sales volume
Total number of units sold over a period of time
define salary
a fixed sum of money which is paid in monthly instalments to workers
define fixed costs
costs that a business pays out for that DO NOT CHANGE no matter how much is produced e.g. rent, salary, loan repayments, (individual fixed costs)
formula for total costs
fixed costs + variable costs
define contribution
is the profit made on each product, calculated by selling price minus variable cost per unit. This can be used to calculate the break-even point.
Formula for total contribution
the contribution per unit multiplied by the number of units sold.
define the margin of safety
the difference between the actual level of output and the break-even level of output. It indicates how much sales can fall by before the firm reaches the break-even point. A falling margin of safety is a bad thing for firms. Margin of safety is the amount of sales above the break-even point. It is the "cushion" above zero-profit or a loss.
break even point
the point at which the costs of producing a product equal the revenue made from selling the product total fixed costs + total variable costs = total sales revenue
Define Sales Revenue
the value of the total sales made by a business within a certain period of time.
average cost formula
total cost/quantity
formula for profit/loss
total revenue - total costs