Costs & Break Even Analysis (Edexcel IGCSE Business): Flashcards
Exam code: 4BS1
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Define revenue.
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Cards in this collection (50)
Define revenue.
Revenue is the value of the units sold by a business over a period of time.
What is the formula for revenue?
Revenue = quantity sold × selling price.
How do you calculate the average selling price?
Divide the sales revenue by the number of units sold.
Define fixed costs.
Fixed costs are costs that do not change as output changes, such as rent, salaries and insurance.
Define variable costs.
Variable costs are costs that vary directly with output, such as raw materials and packaging.
What is the formula for total costs?
Total costs = fixed costs + total variable costs.
Total variable cost = units × variable cost unit.
Total variable cost = units × variable cost per unit.
True or False?
Total costs can fall to zero if a business produces nothing.
False.
Total costs cannot be zero, as all firms have some fixed costs to pay even at zero output.
Define profit.
Profit is the surplus that remains after business costs have been subtracted from revenue.
What is the formula for profit?
Profit = revenue − total costs.
If a business's costs exceed its revenue, it makes a .
If a business's costs exceed its revenue, it makes a loss.
Name three ways a business can increase its profit.
Increasing revenue, reducing costs, or a combination of both.
True or False?
Revenue should be defined simply as 'money earned'.
False.
Revenue is the value of units sold — not just 'money earned', as businesses can also earn from investments.
Define the break-even point.
The break-even point is the number of units a business must sell for revenue to equal total costs.
True or False?
At the break-even point, a business makes a small profit.
False.
At the break-even point, neither a profit nor a loss is made.
Why is the break-even point useful to a business?
It shows the minimum sales needed to cover all costs, helping decisions on pricing and production.
What three elements are used to calculate the break-even point?
Fixed costs, variable costs, and revenue (via contribution).
Define contribution.
Contribution is the difference between the selling price per unit and the variable cost per unit.
What is the formula for contribution?
Contribution = selling price per unit − variable cost per unit.
Fixed costs, such as rent and insurance, do not change regardless of the level of .
Fixed costs, such as rent and insurance, do not change regardless of the level of output.
What is the formula for revenue?
Revenue = quantity sold × selling price.
If you know revenue and the number of units, selling price per unit = revenue ÷ number of .
If you know revenue and the number of units, selling price per unit = revenue ÷ number of units.
True or False?
Variable costs increase as output increases.
True.
Variable costs vary directly with output, so they increase as output rises (e.g. raw materials).
Give an example of a fixed cost and a variable cost.
Fixed: rent, salaries or insurance. Variable: raw materials or packaging.
What is the formula for the break-even point in units?
Break-even point (units) = fixed costs ÷ contribution.
What is the formula for contribution per unit?
Contribution = selling price − variable cost per unit.
The break-even point should always be rounded to the nearest whole unit.
The break-even point should always be rounded up to the nearest whole unit.
If variable cost per burger is €2.30 and it sells for €4.95, what is the contribution?
€4.95 − €2.30 = €2.65.
If fixed costs are €1,730 and contribution is €2.65, what is the break-even point?
€1,730 ÷ €2.65 = 653 burgers.
To find the contribution per unit, subtract the variable cost per unit from the price.
To find the contribution per unit, subtract the variable cost per unit from the selling price.
True or False?
If fixed costs stay the same, a higher contribution per unit lowers the break-even point.
True.
Because break-even = fixed costs ÷ contribution, a bigger contribution means fewer units are needed to break even.
If the burger stall's fixed costs rise to €2,120 and contribution stays at €2.65, what is the new break-even point?
€2,120 ÷ €2.65 = 800 burgers.
Define contribution.
Contribution is the selling price per unit minus the variable cost per unit.
If a burger's raw materials cost €2.10 and packaging €0.20, what is the variable cost per burger?
€2.10 + €0.20 = €2.30.
True or False?
The break-even point tells you the maximum number of units a business can sell.
False.
The break-even point is the minimum units needed to cover costs, not a maximum.
What three lines are plotted on a break-even chart?
Fixed costs, total costs, and revenue.
On a break-even chart, what does the break-even point represent?
The output level where the revenue and total costs lines cross.
Define the margin of safety.
The margin of safety is the difference between the actual level of output and the break-even point.
How is profit shown on a break-even chart?
As the space between the revenue and total costs lines (where revenue is greater).
On a break-even chart, the fixed costs line is a line, as fixed costs don't change with output.
On a break-even chart, the fixed costs line is a horizontal line, as fixed costs don't change with output.
True or False?
On a break-even chart, the revenue line slopes upwards from zero.
True.
At 0 units revenue is £0, so the revenue line slopes up from the origin.
If actual output is 450 units and break-even is 328, what is the margin of safety?
450 − 328 = 122 units.
What happens to the break-even point if the selling price increases?
The break-even point falls, as revenue is higher at each level of output.
True or False?
An increase in fixed costs raises the break-even point.
True.
Higher fixed costs raise total costs, so the break-even point increases.
A decrease in variable costs the break-even point.
A decrease in variable costs lowers the break-even point.
How does a decrease in the selling price affect the break-even point?
The break-even point rises, as revenue is lower at each level of output.
Give one limitation of break-even charts.
Costs and revenue may not rise in direct proportion (bulk discounts), data is often estimated, and some output may go unsold.
True or False?
Break-even charts assume that all units produced are sold.
True.
A limitation is that the model assumes all output is sold, but businesses keep buffer stock.
A limitation of break-even charts is that cost data is often , so may be unreliable for forecasting.
A limitation of break-even charts is that cost data is often estimated, so may be unreliable for forecasting.
Why might variable costs per unit fall at high output?
A business may negotiate bulk-buying discounts, reducing variable cost per unit.
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