Theme 1 - The relationship between revenue and costs - Flashcards in A Level and IB Economics

Created by: becky.65
Created on: 08-05-17 19:37

What is contribution?

The difference between the price of a product and its variable cost, P - VC

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Why is contribution important for a business?

Every time a product is sold, the contribution from its sale can be used to help pay off the fixed costs of the business. Once break-even point is reached, the contribution begins to create profit. Thus it can help to decide price changes

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What is the break-even point?

The level of output at which the total revenue is exactly the same as the total costs TR = TC. A profit nor loss is being made

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How do you calculate the break-even point?

Total Fixed Costs / Contribution

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What is the margin of safety?

It shows how much sales can fall before the business makes a loss

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What are the strengths of break-even analysis?

Helps to assess the strength of a business idea, helps to assess the levels of output that need to be reached to make a profit, it shows the impact of the changes in price, it enables the calculation of profit over different output levels and it make

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What are the weaknesses of break-even analysis?

It assumes costs rise steadily and that all output is sold, it is only a forecast, knowing the BEP doesn't mean you will be able to sell that amount and markets are dynamic and something other than costs can affect your BEP

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Other cards in this set

Card 2

Front

Why is contribution important for a business?

Back

Card 3

Front

What is the break-even point?

Back

Card 4

Front

How do you calculate the break-even point?

Back

Card 5

Front

What is the margin of safety?

Back

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Theme 1 - The relationship between revenue and costs