Key Terms
● Costs: The expenses a business incurs when producing and supplying products and
services to customers.
● Fixed Costs: These have to be paid even if the business produces or sells nothing.
E.g rent, office salaries, advertising, insurance, depreciation, etc.
● Variable Costs: These vary directly with the level of output. If output doubles, the
variable costs double. If the output halves, the variable costs halve. If output were
zero, no variable costs would be incurred. E.g direct labour, raw materials, packaging
costs, royalties paid, etc.
● Total Cots: This is the total of variable and fixed costs added together.
● Revenue: This refers to the money earned from selling manufactured goods; the total
revenue of a business is based on both the level of output and the selling price per
unit.
● Break-even: This refers to the level of output at which total revenue equals total
costs. Break-even can be used to:
a. Calculate the level of sales and unit price of each item needed to cover total costs.
b. See how changes in sales or costs affect profits.
● When calculating break-even, there are a number of assumptions made:
a. All output is sold
b. The business makes only one type of product
c. All costs can be classified as either fixed or variable
● Margin of safety: This refers to the amount by which demand can fall before a
business starts making losses. To calculate margin of safety:
● Actual Output- Break-even output
Cash Flow Key Terms
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