Business Costs and Revenue

Chapter 6

Fixed/Overhead Costscosts which do not vary with the number of items sold or produced in the short term
Variable/Direct Costscosts which vary with the number of items sold or produced
Total Costsfixed and variable costs combined
Marginal Costsextra costs to a business that occurs by producing one more unit of output

Breakeven Charts

  • Graphs which show how costs and revenue of a business change with sales and the level of sales the business must make in order to breakeven
  • The breakeven point is where total cost=total revenue


  • Expected loss and profit can be read
  • Shows impact on sales due to certain business decisions
  • Shows the safety margin


  • Does not show the possibility that stocks may build up if not all goods are sold
  • Fixed costs only remain constant if the scale of production doesn’t increase
  • Many other aspects have to be taken into account which are not
  • The costs and revenues are assumed to be drawn with a straight line


  • Contribution= Selling Price- Variable Cost
  • Breakeven= Total Fixed Cost / Contribution
  • Average Cost Per Unit= Total Cost / Total Output

Economies of Scale

  • The factors that lead to reduction in average costs as a business increases its size
  • Purchasing Economies:
    reduced cost of each item bought by buying in large numbers
  • Financial Economies:
    More sources of finance
    Easy to get loans
    Lower interest rates
  • Marketing Economies:
    Bulk buying discount
    Ability to hire specialist staff
    Lower cost of advertisement
  • Technical Economies:
    Research and development
    Better transport
  • Risk-bearing Economies:
    Many suppliers
  • Managerial Economies:
    Managers in every department
  • Welfare Economies:
    Benefits whole economy

Diseconomies of Scale

  • Factors which lead to an increase in average costs as a business grows beyond a certain size
  • Management Diseconomies:
    Decision making takes time
    Poor communication
    Less contact with customers
  • Labor Diseconomies:
    Labor becomes bored
    Less cooperation
    No connection with management
    Less attentive
    Quality suffers
    Low morale
    Strikes and disruption


  • Forecasts are the predictions of the future
  • They can help predict:
    sales & demand
    exchange rate
    wage increases

Forecasting Methods

  • Past sales could be used to calculate the trend (underlying movement of the direction of data overtime)
  • Use a scatter diagram to draw the line of best fit (series of points which best show the trend of data)
  • Panel consensus
  • Market research surveys


  • Plans for the future containing numerical or financial targets
  • Budgeting reviews past activities through comparing budgeted figures with actual figures
  • It controls current business activity by keeping to targets
  • It plans for the future by setting goals


  • Provide motivational targets
  • They can conduct a variance analysis to control how the business is performing by comparing budgets with the actual figures. The difference between the budget and the actual is the variance.
  • Involves everyone in the company by setting targets
  • Budgets are likely to be more realistic if everyone if worker participation is encouraged
  • This could lead to higher productivity, morale and efficiency
  • Increases efficient allocation of money

2 thoughts on “Business Costs and Revenue

  1. Rae SncumoJune 22, 2020 / 9:42 am

    this is great but some topics are missing such as how market works i.e demand and supply,means of payment and m business management.
    please can you add some more toptics


    • emJuly 16, 2020 / 3:36 pm

      Try this: 🙂


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