BTEC Business - E2

Variable costs - Where the price varies with level of output. Eg. Raw materials

Semi-variable costs - Part of the cost stays the same and part varies in relation to the degree of business activity. Eg. Worker is paid a fixed rate but also overtime at certain times.

Fixed costs - Doesn't vary on ouput. It stays the same. Eg. Rent

Total costs - All costs added together. 

Total revenue - Total amount of money coming in from sales.

Total sales - Amount of sales made in a set period of time, eg. a year.

Selling price per unit - Amount a customer pays for each unit. 

Sales in value - sales expressed in monetary value, eg. in pounds (£). 

Sales in volume - Sales expressed as a quantity, eg. tonnes/ units. 

Sales volume - This is the quantity of output sold in a particular time period. The number of units sold will depend on the business. 

The point at which a business is not making a profit or loss. Money being received from sales is the same as money being spent on costs. 

Total Revenue = Total Costs

This is the actual number of units sold over and above the break even point. 

Revenue refers to the amount of income generated. It's very important for a business. 

It determines how profitable a business is and impacts whether a company can secure a bank loan or attract investors. 

It's essential for long term survival. A company cannot remain in business for a long time without it. 

Profit creates cash. Companies that don't have cash cannot afford to purchase new equipment or hire new employees which limits growth. 

It can prevent adaptibility to changing market conditions, eg. technology. 

A break even chart plots the costs and revenues at each unit of output. The break even point is where the total cost line crosses the total revenue line. It can be used to calculate margine of safety or profit/ loss at different levels of output.  

- Profit is shown by the space between costs and revenue above the break even point. 

- Loss is shown by the space between costs and revenue below the break even point. 

- Break even point is where the total costs line and total revenue lines cross. 

- Margin of safety is the amount by which the sales would have to fall before the break even. 

Identification of area of profir and area of loss - 

Break even level of output is the level of output where the business is making neither a profit or a loss. If the business sells less than the break even point, then it is making a loss. For every item sold above the break even point it is making a profit. It can be shown on a break even chart. 

Contribution per unit is used by businesses to help inform decision making.

Benefits: 

- Straightforward to calculate. 

- Allows for the calculation of break even level of output.

- Can be used to inform decision, eg. what price to charge. 

- Can be used to carry out 'what if' analysis. 

Limitations:

- Does not take into account fixed costs.

- Assumes that prices remain constant.

- Doesn't take into account any unexpected changes to variables, eg. variable costs can fluctuate.

Planning - Able to set budget for amount of sales and necessary costs. It forms part of a plan to show at what point the business will start to make a profit. It informs on pricing decisions.

Monitoring - Can monitor progress towards achieving the break even point. Able to identify changes to selling price of costs. Can take corrective action if targets look unlikely to be met. 

Control - Keep costs within budget. Motivate employees. Manage sales accounts. 

Target Setting - Set sales targets for individual employees, teams or products. Set expenditure budgets or profit budgets based upon sales targtes and cost targets. 

- The business knows how many items it must sell in order to break even. 

- Informs decisions on what price to charge.

- Can set targets. 

- Identifies fixed and variable costs.

- Can identify if costs are too high allowing the business to look for ways of lowering costs.

- Can set targets which will motivate employees. 

- Easy way to calculate profit or loss at different levls of output.  

- Doesn't take into account variations in costs or selling price. 

- Forecast sales may not be achieved and hence, even though the break even point is known, it may not be achieved. 

- Targets set may be too high, creating stress.