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Flip to reveal answersIf costs increase and revenue stays the same, what happens to profit?
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All 20 Flashcards — Impact of cost and price changes
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Question
If costs increase and revenue stays the same, what happens to profit?
Answer
Profit decreases because total costs rise while revenue is unchanged.
💡 Hint
Profit = revenue − costs.
Question
If a business increases its price, what are the two main effects?
Answer
Revenue per unit rises, but demand may fall.
💡 Hint
Price up: unit revenue up, quantity may down.
Question
State the formula for break-even output (units).
Answer
Break-even output = Fixed costs ÷ (Price − Variable cost per unit).
💡 Hint
Contribution per unit = price − variable cost.
Question
What is the overall impact of rising costs on profit?
Answer
Rising costs reduce profit margins and may force the business to raise prices, cut costs, or accept lower profit.
💡 Hint
Costs up = margins down.
Question
If variable costs rise and price stays the same, what happens to break-even output?
Answer
Break-even output increases because contribution per unit falls.
💡 Hint
Denominator gets smaller.
Question
If a business decreases its price, what are the two main effects?
Answer
Revenue per unit falls, but demand may rise.
💡 Hint
Price down: unit revenue down, quantity may up.
Question
Give one way a business might respond if its costs rise.
Answer
It could raise prices, cut costs elsewhere, or find cheaper suppliers to protect profit margins.
💡 Hint
Think: raise prices, cut costs, change supplier.
Question
Why can raising prices be risky?
Answer
Because higher prices may reduce demand, leading to lower sales revenue and loss of market share.
💡 Hint
Price up can reduce quantity sold.
Question
If price rises and costs stay the same, what happens to break-even output?
Answer
Break-even output decreases because contribution per unit increases.
💡 Hint
Denominator gets bigger.
Question
If costs fall and prices stay the same, what happens to break-even output?
Answer
Break-even output decreases because profit per unit (contribution) increases.
💡 Hint
Need fewer sales to cover fixed costs.
Question
Why can total revenue rise or fall after a price increase?
Answer
It depends on how much demand falls. If demand falls slightly, total revenue may rise; if it falls a lot, total revenue may drop.
💡 Hint
Think: demand response.
Question
What happens to profit margins when costs increase?
Answer
Profit margins shrink, and the business may make a loss if costs rise enough.
💡 Hint
Margins = profit per sale.
Question
What concept determines how demand responds to a price change?
Answer
Price elasticity of demand.
💡 Hint
Elasticity = sensitivity to price.
Question
Fixed costs are $30,000. Price is $25. Variable cost is $15. Calculate break-even output.
Answer
Contribution per unit = $25 − $15 = $10. Break-even output = $30,000 ÷ $10 = 3,000 units.
💡 Hint
Compute contribution first.
Question
In exam questions about new break-even, what should you always do?
Answer
Recalculate step by step using the updated price or costs, showing working to earn method marks.
💡 Hint
Update only affected figures, then recalc.
Question
If costs decrease and price stays the same, what happens to profit?
Answer
Profit increases because the business keeps more of its revenue after paying costs.
💡 Hint
Lower costs = higher profit (if price unchanged).
Question
What is the key idea linking price/cost changes to break-even?
Answer
Price and variable cost changes affect contribution per unit, which shifts the break-even output.
💡 Hint
Contribution is the link.
Question
Why does break-even change when price or variable cost changes?
Answer
Because both affect contribution per unit (Price − Variable cost), which changes how quickly fixed costs are covered.
💡 Hint
Contribution drives break-even.
Question
Why might cutting costs improve competitiveness?
Answer
Lower costs can allow a business to reduce prices or invest more in marketing/quality while still maintaining profit.
💡 Hint
Lower costs create strategic options.
Question
Give one example of a product with relatively inelastic demand.
Answer
Essential goods such as basic food items, medicine, or utilities tend to have inelastic demand.
💡 Hint
Essentials = less sensitive to price.
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Topic 3.3 hub
Costs and revenues
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