Financial Terms & Calculations (AQA GCSE Business): Flashcards
Exam code: 8132
1/450Still learning
Know0
Define fixed costs.
Was this flashcard helpful?
Cards in this collection (45)
Define fixed costs.
Fixed costs are costs that do not change as the level of output changes, such as building rent, management salaries and insurance.
True or False?
A business pays no fixed costs if it produces nothing.
False.
Fixed costs must be paid whatever the level of output, even when the business makes no units at all.
Define variable costs.
Variable costs are costs that vary directly with output, rising as output increases and falling as it decreases.
How are total variable costs calculated?
Total variable costs are calculated using this formula:
Total variable costs = Variable costs per unit × Number of units
How are total costs calculated?
Total costs are calculated using this formula:
Total costs = Fixed costs + Total variable costs
Variable costs stop rising in proportion to output once a firm benefits from a purchasing ______________.
Variable costs stop rising in proportion to output once a firm benefits from a purchasing economy of scale.
Define revenue.
Revenue is the value of the units sold by a business over a period of time.
Revenue = Selling price × Quantity sold
True or False?
Revenue usually increases as sales volume increases.
True.
Each extra unit sold adds its selling price to revenue, so revenue usually rises with sales volume.
Define profit.
Profit is the surplus that remains after business costs have been subtracted from revenue.
Profit = Revenue − Total costs
A business makes £9 profit per item. Variable costs are £2.30 per item and fixed costs of £8.45 are assigned to each item. What is the revenue per item?
Total cost per unit is £2.30 + £8.45 = £10.75. Adding the profit gives revenue per item of £10.75 + £9 = £19.75.
What does a business make when its costs exceed its revenue?
When costs exceed revenue, the business makes a loss.
Profit is a ____ for the risks taken by entrepreneurs and investors.
Profit is a reward for the risks taken by entrepreneurs and investors.
What are the three strategies a business can use to increase profit?
A business can increase revenue, reduce costs, or use a combination of both.
Why do businesses invest in land and buildings?
Businesses buy, renovate, upgrade or extend land and buildings to house their operations. Owning them gives the business control over these spaces.
How can investing in new or upgraded machinery benefit a business?
It can help reduce average production costs, increase quality and maintain efficiency.
Developing prototypes, beta testing and test marketing are examples of ______________________ activities.
Developing prototypes, beta testing and test marketing are examples of research and development activities.
Define average rate of return (ARR).
The average rate of return (ARR) compares the average yearly profit generated by an investment with the cost of the investment, expressed as a percentage.
Average rate of return = Average yearly profit ÷ Cost of investment × 100
True or False?
An investment with a lower ARR is more worthwhile than one with a higher ARR.
False.
The higher the ARR, the greater the return, so investments with high average rates of return are more worthwhile.
How is the average yearly profit found when calculating ARR?
Subtract the cost of the investment from the total forecast returns, then divide by the number of years of use.
An investment costs $40,000 and is forecast to generate total returns of $76,000 over 6 years. What is its ARR?
Average yearly profit is ($76,000 − $40,000) ÷ 6 = $6,000. ARR is $6,000 ÷ $40,000 × 100 = 15%.
True or False?
ARR is easy to understand and allows the returns on different investments to be compared.
True.
Because ARR is a percentage, it is easy to understand and to compare across different investments.
Why might an ARR calculation be inaccurate?
ARR depends on forecasts of future profits, which may not be accurate.
Which cost does ARR ignore when judging an investment?
ARR ignores the opportunity cost of the investment, as its values are not adjusted for interest rates and time.
Define break-even analysis.
Break-even analysis is a financial tool used to find the number of units a business must sell for its revenue to equal its costs, so it makes neither a profit nor a loss.
Define fixed costs.
Fixed costs are costs that do not change regardless of the level of production or sales, such as rent and insurance.
True or False?
Variable costs increase in direct proportion with the level of output.
True.
Variable costs, such as raw materials and packaging, rise in direct proportion with output, so they grow as the business produces more.
How are total costs calculated?
Total costs are calculated using this formula:
Total costs = Fixed costs + Total variable costs
How is sales revenue calculated?
Sales revenue is calculated using this formula:
Sales revenue = Selling price × Number of items sold
Break-even analysis is useful for communicating with __________ such as investors and lenders.
Break-even analysis is useful for communicating with stakeholders such as investors and lenders.
How does break-even analysis help with pricing decisions?
It helps managers set prices at a level that generates sufficient revenue to cover costs and generate a profit.
Break-even analysis provides a ____ for achieving profits, as it shows the level of sales needed.
Break-even analysis provides a target for achieving profits, as it shows the level of sales needed.
How can break-even analysis help with performance monitoring?
Businesses can compare actual sales and costs against the break-even point to assess their financial health and track progress.
True or False?
Break-even analysis is completely reliable because it is based on actual results.
False.
Break-even analysis is based on forecasts, which may be inaccurate. It also assumes that all output is sold.
Why is break-even analysis less useful for a business that sells several products?
Break-even analysis works best for a single product, so it is harder to apply when a business sells several different products.
Define break-even chart.
A break-even chart is a visual representation of the break-even point that shows fixed costs, total costs and revenue over a range of output.
True or False?
The revenue line on a break-even chart slopes more steeply than the total costs line.
True.
The revenue line slopes more steeply, which is why the business can eventually cover all its costs as output rises.
Why does the total costs line start above zero on a break-even chart?
At zero output, total costs are made up only of fixed costs, so the line starts at the level of fixed costs.
Where is the break-even point on a break-even chart?
The break-even point is where the total costs line and the revenue line cross.
What happens if output is less than the break-even point?
If output is less than the break-even point, the business makes a loss because total costs are greater than revenue.
Define margin of safety.
The margin of safety is the difference between the actual level of output and the break-even level of output.
Margin of safety = Actual output − Break-even output
On a break-even chart, the margin of safety is measured along the ____.
On a break-even chart, the margin of safety is measured along the x-axis.
How is profit shown on a break-even chart?
Profit is shown as the space between the revenue line and the total costs line at output levels above the break-even point.
A business has a break-even output of 324 units and actually produces 450 units. What is its margin of safety?
The margin of safety is 126 units (450 − 324).
True or False?
The fixed costs line on a break-even chart slopes upwards as output increases.
False.
Fixed costs do not change as output increases, so the fixed costs line stays flat at the same level.
At an output of 4,000 units, revenue is £40,000 and total costs are £34,000. What profit is made?
The profit made is £6,000 (£40,000 − £34,000).
Sign up to unlock flashcards
or