Question 1

What is the difference between fixed and variable costs?

Accepted Answer

Fixed costs do not change with the level of output, such as rent, insurance, and salaries. Variable costs change directly with output, like raw materials and packaging. For example, a bakery pays the same rent each month (fixed), but the cost of flour increases as it bakes more bread (variable).

Question 2

How do you calculate profit and loss?

Accepted Answer

Profit is calculated as Total Revenue minus Total Costs. If the result is positive, it's profit; if negative, it's a loss. Total Revenue = Selling Price × Quantity Sold. Total Costs = Fixed Costs + Variable Costs. For example, if a business sells 100 items at £10 each, revenue is £1,000. If fixed costs are £300 and variable costs are £5 per item (£500 total), total costs are £800, so profit is £200.

Question 3

What is the break-even point and why is it important?

Accepted Answer

The break-even point is the level of sales where total revenue equals total costs, resulting in zero profit or loss. It's important because it tells a business how many units it must sell to cover all costs. Beyond this point, each sale generates profit. Managers use it to set sales targets and pricing strategies.

Question 4

Can a business have high revenue but still make a loss?

Accepted Answer

Yes, if its costs are even higher than its revenue. For example, a startup might sell many products (high revenue) but have huge fixed costs like rent and marketing, plus high variable costs, leading to a loss. Profit depends on the gap between revenue and costs, not just revenue alone.

Question 5

How does a change in selling price affect profit?

Accepted Answer

Increasing the selling price can increase profit per unit, but it might reduce the quantity sold if customers are price-sensitive. Lowering the price might boost sales volume but reduce profit per unit. The overall effect on profit depends on the price elasticity of demand. For example, a 10% price rise might cause a 5% drop in sales, increasing total revenue and profit if costs stay the same.

Question 6

What is the margin of safety?

Accepted Answer

The margin of safety is the difference between the actual level of output and the break-even output. It shows how much sales can fall before the business starts making a loss. For example, if break-even is 500 units and actual sales are 700 units, the margin of safety is 200 units. A higher margin of safety means lower risk.

Revenue, costs, profit and loss

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Related Topics in OCR GCSE Business

Break-even

Business activity

Business aims and objectives

Business growth