3.2 Costs and Revenues Warm Up: Check your stock portfolio on howthemarketworks.com Select the IB Business Management portfolio In the menu, press rankings.

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Presentation transcript:

3.2 Costs and Revenues Warm Up: Check your stock portfolio on howthemarketworks.com Select the IB Business Management portfolio In the menu, press rankings and see if you are ranked in the top 15

Introduction Cost refers to the total expenditure incurred by a business in order to run its operations Revenue is a measure of the money generated from the sale of goods and services Profit is calculated by finding out the difference between revenues and costs. A high positive difference is a good indicator of business success.

Types of costs Fixed costs: costs that do not change with the amount of goods or services being produced (rent, insurance, salaries, interest payments) Variable costs: costs that change with the number of goods or services produced (raw material costs, sales commissions, packaging, and energy usage) Semi-variable costs: costs comprising of both fixed and variable components (labor costs, monthly rental for phone line) Direct costs: costs that can be identified with the production of specific goods or services (raw materials, direct labor, packaging) Indirect costs: costs that are not clearly identified with the production of specific goods or services (rent, legal expenses, insurance, advertising, security, interest on loans, office staff salaries)

Total Revenue Total revenue is the total amount of money a firm receives from the sale of goods or services Total Revenue = Price Per Unit x Quantity Sold TR=PxQ Revenue of a company could also include: Rental income Sale of fixed assets Dividends Interest on deposits Donations, Grants, and Subsidies

Question: Stir Fry Stir Fry operates a small stall in a popular market, selling chicken and rice to a variety of regular and loyal customers. It is renowned for the quality of its meals, and some customers are prepared to travel long distances to enjoy the food. Monthly costs are shown below: Fixed costsRent5000 Van1000 Staff6000 Variable Chicken1.00 Rice0.20 Paper plates0.10 Electricity0.10 Other0.10 They currently sell 6000 dishes of chicken and rice per month for $ 4.00 per dish. a) With reference to Stir Fry, explain the difference between fixed costs and variable costs. b) What is Stir Fry’s total revenue in one year?

Answer Key a) Fixed costs are those costs that do not vary with the quantity produced, eg rent, van and staff. Variable costs are those costs that do vary directly with the quantity produced, eg electricity and paper plates. [3 to 4 marks] The difference between fixed and variable costs is explained. For [4 marks] reference is made to Stir Fry. [1 to 2 marks] The difference between fixed and variable costs is understood but the answer lacks detail. There may be little or no reference made to Stir Fry. There may be no reference to quantity. b) $288,000