3.3.2 H OW TO IMPROVE PROFIT I bought a car for £200 and sold it for £300. A month later I bought the same car for £500 and sold it for £600. Overall, what was my profit or loss?

P ROFIT H OW TO IMPROVE PROFIT  The relationship between costs and revenue will determine if the business makes a profit or a loss.  Total Revenue (TR) – money coming in from sale of goods and services  Total Costs (TC) – money going out to provide for and generate those sales  Profit = TR - TC Example 2 Example 1 TR £1000 TC £800 Profit £200 TR £1200 TC £1300 Loss £100 There is a surplus (a profit) of £200 There is a shortage (a loss) of £100

C ALCULATING P ROFIT H OW TO IMPROVE PROFIT  Restaurant example  Fixed Cost £12000  Variable Cost £5 per customer  Selling price £15 per customer Customers Fixed Costs12000 Variable Costs Total Costs Total Revenue Profit / Loss(12000)(7000)(2000)3000 Profit = Total Revenue – Total Costs

C UTTING COSTS H OW TO IMPROVE PROFIT  A business may look to cut the cost of making the product through:  Cheaper supplies e.g. raw materials – this might impact on quality  Cheaper labour – lowering wages and bringing in cheaper workers might impact on morale and quality  Lower marketing budget – this might have a negative impact on sales revenue as less people are aware of the product being sold  Cut research and development budget – without new products it may be difficult to gain customers. If the competition bring out new products market share may decline

Q UESTION TIME 200 hoodies Variable costs£ Fixed costs£ Total costs£ Rowena plans to start selling children’s hoodies on a market stall. She has forecast that her monthly costs if she sells 200 hoodies would be: A variable cost of £6 for each hoodie sold Total fixed costs of £1800 (a) Complete the table using this information. (3 marks) (b) What would the fixed cost be if Rowena sold 100 hoodies? (1 mark) (c) What would her profit/loss be if she sold her hoodies at £20? (1 mark)

I NCREASING REVENUES H OW TO IMPROVE PROFIT  A business may look to increase revenues through:  Better marketing – this is likely to lead to an increase in the marketing budget so costs will rise  Training and recruitment – better staff are likely to lead to higher sales. This will require investment and may take time  Research and development budget – new product development will hopefully see an increase in sales. However, it is expensive and the majority of products never see the light of day  Improved quality – customers might be willing to spend more on better quality products

B USINESS A DVICE H OW TO IMPROVE PROFIT Rowena wants to increase her profit levels. A friend has said this should be easy if she can either reduce costs or increase revenue. Rowena thinks this might be more difficult than it sounds, she has asked you for some help. In pairs identify what Rowena could do. For each option identify the possible advantages and disadvantages. Draft an e mail to Rowena explaining what her best course of action would be and why.

F ACTORS AFFECTING PRICING DECISIONS A variety of factors will affect the pricing decisions made by businesses, including:  The nature of the market Who is the customer and what are they willing to pay for the product? Brand image is important in allowing firms to charge higher prices  The degree of competition Fewer businesses mean less competition. Firms will tend to compete on factors other than price e.g. promotion  The type of product Some products have no close substitutes – if price rises people will still buy them. These include petrol, alcohol and cigarettes

Q UESTION TIME H OW TO IMPROVE PROFIT Cost cutter is a UK convenience retailer. In 2011 the Directors announced a small dip in profits, in 2012 the profit had been £106m this had fallen to £103m. The Directors however remained optimistic and said they would make “every effort” to help retailers improve their business. 1.What is meant by the term “profit”?(2) 2.Explain one factor that would influence the prices charged by Costcutter.(3) 3.Outline two methods Costcutter might use to improve its performance.(6) Discussion: What factors might have contributed towards the fall in profits?

3.3.2 H OW TO IMPROVE PROFIT C ALCULATING C OSTS, R EVENUES AND P ROFIT A CTIVITY – C AN YOU MAKE A PROFIT ?  You have been asked to run a stand at the school fair  You think that a chocolate fountain could be a huge attraction – but can you make a profit?  Use the link to identify the costs involved in hiring a fountain and the ingredients – which one you choose is your choice!  What is your total cost?  How many customers can you serve?  What will be your selling price?  Draw a table to show costs, revenues and profit or loss for different customer numbers  Present your proposal to the rest of the class Class discussion: Why is it important for an entrepreneur to make a profit?