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