IB Business & Management Revision Workbook ANSWERS

5.2 Costs and Revenues

U nit 5 .2
C osts a n d R eve n ue s
Task 1 Vocab Quiz

Key Term
Cost centre (HL Only)
Direct costs
Fixed costs
Overheads
Profit centre (HL Only)
Revenue
Total costs
Unit costs
Variable costs

Task 2 Calculations
a.
i.

(15 x 200) + 500 = $3,500

ii.

($35 x 200) $3,500 = $3,500

iii.

Sales are higher at 200 units so the fixed costs are spread over more units (hence AC fall
from $20 to $17.5). This means that the firm has experienced economies of scale, i.e.
falling AC as output increases.

i.

[($2 x 3,000) + $3,000] / 3,000 = $3

ii.

$3,000 / ($6 $3) = 1,000 units for break even. Therefore the margin of safety is
3,000 1,000 = 2,000 units.

b.

IB Business & Management Revision Workbook ANSWERS

5.2 Costs and Revenues

c.
i.

TVC = $5 * 2,000 = $10,000

TFC = $5,500
Hence, TC = $15,500

ii.

TR = $15 * 2,000 = $30,000

Hence, profit = $30,000 - $15,500 = $14,500

i.

$2,000

ii.

It falls from $50 per unit ($5,000 100) to just $36.67 ($11,000 300), i.e. it
experiences economies of scale.

iii.

Average costs = $40 ($8,000 200) so the price must be 150% higher, i.e. set at $100

d.

Task 3 True or False?

True / False
T
F
T
F
F
F
T
T
T

Task 4 Explain
a.
Fixed costs, such as rent and advertising, do not change with the level of output. By contrast,
variable costs (such as wages and commission) continually rise with greater levels of output.
b.
The fixed costs are spread over an increasingly larger level of output and hence the average fixed
costs must fall.
c.
Cost centres are accountable for their contribution towards the firms overheads whereas profit
centres are also held accountable for their contribution of revenues.
d.
It is less time consuming and more cost effective to use full costing, especially if the business has a
wide range of products; Share resources such as floor area and machinery make absorption costing
difficult and subjective to calculate; Full costing is simple and allows a consistent criterion to be
used.

IB Business & Management Revision Workbook ANSWERS

5.2 Costs and Revenues

Task 5 What type of cost?

Type of cost

Fixed

Advertising/promotional materials

Equipment and tools

Furniture (e.g. tables and chairs)

Market research

Variable

Mobile telephone bills

Packaging materials
Premises and buildings

Semi-variable

Food supplies

Staff salaries

Staff wages

Utility bills (e.g. gas and electricity)

Vehicles (e.g. delivery cars)

Task 6 Cost and Revenue Formulae

Type of Cost / Revenue

Average cost
Average revenue (or Price)
Marginal cost
Total cost
Total revenue
Unit contribution

Task 7 Multiple Choice

1.

A.

Fixed costs

2.

B.

Waiting staff wages

3.

C.

Interest on bank loans

4.

D.

Communications equipment

5.

C.

Sales

IB Business & Management Revision Workbook ANSWERS

6.

A.

Variable costs

7.

B.

Unit contribution

8.

C.

Insurance costs

9.

B.

Falling too and at a faster rate

10.

D.

Average Fixed Costs

11.

B.

Costs that are fixed in the short run

12.

B.

Quantity

13.

C.

$7,200

14.

B.

$1.50

15.

D.

$2,345

5.2 Costs and Revenues