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Questions and Answers
What is the primary difference between economic profit and accounting profit?
What is the primary difference between economic profit and accounting profit?
- Economic profit includes opportunity cost, while accounting profit does not (correct)
- Accounting profit considers fixed costs only
- There is no difference between them
- Economic profit is always higher than accounting profit
Sunk costs should always be included in current decision-making.
Sunk costs should always be included in current decision-making.
False (B)
What is the formula for calculating the break-even point?
What is the formula for calculating the break-even point?
Fixed Cost / (Price per unit - Variable Cost per unit)
The _______ cost is defined as the expenses that remain constant regardless of the volume of sales.
The _______ cost is defined as the expenses that remain constant regardless of the volume of sales.
Match the following terms with their definitions:
Match the following terms with their definitions:
Which of the following describes variable costs?
Which of the following describes variable costs?
Accounting cost is the total of fixed costs only.
Accounting cost is the total of fixed costs only.
What does the term breakeven point (BEP) refer to?
What does the term breakeven point (BEP) refer to?
Flashcards
Revenue
Revenue
Total monetary value of goods and services sold.
Cost
Cost
Expenses incurred to generate revenue.
Variable Cost
Variable Cost
Costs that change with sales volume.
Fixed Cost
Fixed Cost
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Accounting Cost
Accounting Cost
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Economic Cost
Economic Cost
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Accounting Profit
Accounting Profit
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Economic Profit
Economic Profit
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Sunk Cost
Sunk Cost
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Sunk Cost Fallacy
Sunk Cost Fallacy
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Break-Even Point (BEP)
Break-Even Point (BEP)
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Shutdown Rule
Shutdown Rule
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Opportunity Cost
Opportunity Cost
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Ceteris Paribus
Ceteris Paribus
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Study Notes
Revenue and Cost Concepts
- Revenue: Total monetary value of goods/services sold
- Cost: Total expenses incurred to generate revenue over a period
- Variable Cost: Expenses that change with sales volume
- Fixed Cost: Expenses that don't change with sales volume
- Accounting Cost: Sum of variable and fixed costs
- Economic Cost: Accounting cost plus opportunity cost
- Sunk Cost: Money spent in the past that shouldn't be considered in current decisions
Profit and Loss
- Profit: Revenue is higher than cost
- Loss: Cost is higher than revenue
Accounting vs. Economic Profit
- Accounting Profit: Difference between revenue and accounting cost
- Economic Profit: Difference between revenue and economic cost (accounting + opportunity cost).
Sunk Cost Fallacy
- Tendency to continue an endeavor despite past investment losses
- Past investments should not influence present decisions
Economic Perspective on Venture Decisions
- Should ignore sunk costs and consider opportunity costs when evaluating ventures.
- Evaluate if zero or positive economic profit is achieved
Firm Value
- Value of firm: Collective economic profits in the future.
Break-Even Analysis
- Break-even point: Where revenue equals cost, no economic profit or loss
- Formulas to calculate break-even quantity and price using fixed cost, price per unit and variable cost per unit
Shutdown Rule
- If selling price is less than average variable cost, firm should shut down operations immediately.
Demand Concepts
- Demand Curve: Graph showing the relationship between price and quantity demanded
- Law of Demand: Price increase leads to quantity decrease
Ceteris Paribus
- Latin phrase meaning "other things being equal"
- Used when analyzing the relationship between two variables
- Variable costs per unit, quantity and fixed cost
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