REVENUE, COSTS AND PROFIT Revenue is the value of total sales made by a business within a period, usually one year. Costs are the expenses incurred by a firm in producing and selling its products. Profit can be defined as the difference which arises when a firms sales revenue exceeds its total costs.

SALES REVENUE Sales Revenue = volume of Goods sold x average selling price Reasons for low sales revenue in a new business: Their product is not well known They are unlikely to be able to produce large quantities of output (no economies of scale) It is difficult to charge a high price for a product that is not established in the market NB Remember Price Elasticity of Demand when considering sales revenue

THE COSTS OF PRODUCTION Opportunity Costs (Economist) Accounting Costs (Accountant) V Managers need to consider costs to: Assess profitability to supply the market at the current price Actual costs to compare to forecasted costs (judge efficiency) Assess whether sufficient finance

TYPES OF COSTS FIXED COSTS Costs that do not vary with output VARIABLE COSTS Costs that vary directly with output TOTAL COSTS Fixed costs plus variable costs Costs Output Fixed cost Variable cost Total cost

TYPES OF PROFIT GROSS PROFIT = the revenue earned by a firm less the cost of achieving the sales OPERATING PROFIT = this is the firm’s gross profit minus the overheads associated with production PRE TAX PROFITS = the business’s operating profit plus one off items such as the costs of restructuring PROFIT AFTER TAX = this is simply the profits left after tax has been deducted (corporation tax)

PROFIT: IMPORTANCE & UTILISATION IMPORTANCE Profit provides a measure of a business’s success Profit provides funds for investment in further fixed assets Profit acts as a magnet to attract further funds from shareholders Profit is a source of finance that allows a company to grow. UTILISATION Paid to shareholders in the form of dividends Retained within the company for future investment