Week 8 Revenue, Expenses, COGS, variable and fixed costs

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Questions and Answers

What is revenue primarily determined by?

Employee salaries

Number of employees

Geographic location

Sales volume (correct)

Which company had a higher profit despite lower revenue?

Soapy Suds Company (correct)

Neither made a profit

Both had the same profit

Soap Company

Why is profit considered more important than revenue?

To reinvest in the business

To attract investors

It shows the company's total sales

It reflects the amount left after expenses (correct)

What can impact a company's profitability if it has reached a price or volume ceiling?

Minimizing expenses Signup and view all the answers

What does COGS stand for?

Cost of Goods Sold Signup and view all the answers

Which factor is NOT mentioned as an influencer of revenue?

Employee salaries Signup and view all the answers

How can a company potentially improve its profitability according to the text?

$ Minimizing expenses Signup and view all the answers

What does revenue NOT directly show?

$ Expenses Signup and view all the answers

$1.2 million in revenue with $1.1 million in expenses results in how much profit?

$100,000 Signup and view all the answers

Which costs are included in Cost of Goods Sold (COGS)?

Raw materials costs Signup and view all the answers

How do variable costs behave as production volume increases?

Increase Signup and view all the answers

What is a reason to evaluate an item with high COGS but potentially keep it?

High sales volume with a low profit margin Signup and view all the answers

How can a bakery maximize profitability based on the specialty artisan bread example?

Prioritize regular white bread over specialty artisan bread Signup and view all the answers

What type of cost is rent considered?

Fixed cost Signup and view all the answers

How are variable costs related to the production volume of a product?

They follow suit as production volume changes Signup and view all the answers

What happens to variable costs if a company discontinues a product line?

"Avoided" costs go away Signup and view all the answers

What distinguishes fixed costs from variable costs?

'Fixed' nature of fixed costs Signup and view all the answers

'Wiggle room' for sales and promotions can be determined by understanding which financial aspect?

'Variable' costs like COGS Signup and view all the answers

'Slow moving, high COGS items can cost you money in lost sales!' - This statement emphasizes the importance of balancing which aspects in product management?

'High profit margins' and sales volume Signup and view all the answers

What does spreading the fixed cost over more products allow a company to achieve?

Economies of scale Signup and view all the answers

In the context of the toy factory example, what type of cost is the rent for the factory?

Fixed cost Signup and view all the answers

What is emphasized in the text as crucial for businesses to focus on besides striving for high revenue?

Bottom line profit Signup and view all the answers

What is suggested as the 'secret sauce' for making businesses thrive according to the text?

Being super passionate Signup and view all the answers

Which concept involves selling each product for a bit less while maintaining profitability?

Economies of scale Signup and view all the answers

What should entrepreneurs review often besides their revenues as mentioned in the text?

Expenses (both fixed and variable) Signup and view all the answers

What specific type of beans does Enchanted Beans Coffee use according to the text?

100% Colombian Exclusively Single-Origin Arabica Beans Signup and view all the answers

What advice is given regarding community and competition in the highlighted entrepreneurial excerpt?

Embrace community support over competition for business success Signup and view all the answers

Study Notes

Cost of Goods Sold (COGS)

COGS includes raw materials, labor costs (directly related to product production), and other direct costs.
It does not include costs associated with marketing, sales, or administration.

Variable Costs

Increase with production volume and decrease with lower production.
Examples: raw materials costs, labor costs directly related to product production.
COGS is often considered a variable cost.

Fixed Costs

Remain the same regardless of production output.
Examples: rent, property taxes, insurance.
Fixed costs can be a challenge for new companies, as they require a certain revenue to break even.

Revenue vs. Profit

Revenue is the total amount of money earned from sales.
Profit is the revenue left after paying all expenses.
Revenue does not show profitability, but it can indicate potential.
Profit margin is more important than revenue.

Managing Expenses

Review business expenses often to minimize costs.
Ways to minimize expenses:
- Efficiency with labor
- Wholesale pricing and partnerships with suppliers
- Shopping around for insurance, rental space, and other fixed costs
- Cutting out high-expense, low-profit offerings
- Considering the pros and cons of renting vs buying equipment, facilities, etc.

Economies of Scale

The ability to spread fixed costs over more products, reducing the cost per unit.
Example: a toy factory can spread the cost of rent over more toys, reducing the cost per toy.

Entrepreneurship and Costs

When starting a business, it's better to have lower fixed costs and higher variable costs.
As the business develops, focus on managing both fixed and variable costs effectively.
Minimize fixed costs by finding efficient solutions, and minimize variable costs by negotiating with suppliers and optimizing production.

Summary

It's not enough to strive for high revenue; businesses must also focus on a healthy profit margin and bottom line.
Reviewing expenses regularly and understanding COGS are crucial for making informed business decisions.
A healthy profit margin is more important than revenue.

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Description

Test your knowledge on revenue and profit by learning about the difference between revenue and profit, and the factors that impact revenue such as sales volume, sales price, and marketing efforts.