1. Sales, revenue and costs

2. Calculating sales, revenue and costs Candidates should be able to: calculate sales volume and sales revenue calculate fixed and variable costs

3. Revenue What is revenue? It is also called _________ So if Anna sold a pair of shoes for £30, what would her revenue be? Revenue = £

4. Calculating revenue Revenue depends on the price and the quantity: Total revenue can be calculated by multiplying the selling price by the number of units sold. Revenue = price X quantity So if Anna sold two pairs of shoes for £30 each, what would her revenue be? Total revenue =

5. Costs Andy wants to set up a business selling sandwiches to offices. What costs will he incur? Costs are also called e____________

6. Classifying costs Costs can be classified in two ways Variable costs vary in direct proportion to output. E.g. if Andy makes twice as many sandwiches he will need twice as much ______ Fixed costs don’t change in relation to output. They remain the same whether 500 or 1000 sandwiches are sold. E.g.

7. Classifying costs: overheads Overheads are costs that do not depend on the output. They include __________________ In other words a business would have to pay rent regardless of how much they produced.

8. Variable costs You will need to be careful when working out calculations with total variable costs since you will probably be given the cost per unit. Use the formula: Total variable costs = variable cost x quantity E.g. Andy’s costs per sandwich are 5p and he makes 200 sandwiches, what are his total variable costs? Total variable costs =

9. Calculating costs Total cost is calculated by adding the total variable costs to the fixed costs. Total cost = total variable costs + fixed costs E.g. Andy spends £30 on kitchen knives, £15 on chopping boards and £50 on an advert in the local paper. His costs per sandwich are 5p and he makes 200 sandwiches, what are his total costs?

10. What does your answer mean? You also need to think what your answer means In the previous example we had: Total cost = £10 + £95 = £105 So this means that it cost Andy £_____ to make ______ sandwiches.

11. Cost per unit If you have the total cost you can work out the cost per unit: Cost per unit = total cost ÷ number of units Look at the previous example, what is the cost per unit? Cost per unit = _______________________ Does this seem cheap or expensive? It seems quite _____________ because it is approximately _____p per sandwich

12. Understanding costs You need to understand costs and you should be able to write about them. Why does Andy have such high costs for sandwiches? What would his total costs be for 1000 sandwiches? What would his cost per sandwich be then? Total cost = Cost per sandwich =

13. Calculating profits Profit is the difference between revenue and costs Profit = total revenue – total costs If Anna bought a pair of shoes for £25 and sold them for £30, what is her profit? Profit =

14. Profit or loss When does a business make a profit? A loss? A business makes a profit when It makes a loss when Why do start-ups almost always make a loss at first?

15. Increasing revenue What is the formula for revenue? Revenue = price X quantity Revenue can be increased by: 1. increasing the selling price 2. increasing the number of units sold

16. Increasing revenue by increasing the price But, what could happen if an entrepreneur decides to increase revenue by increasing the selling price?

17. Increasing revenue by increasing the number sold How can an entrepreneur increase the number of products sold? They could do this by:

18. Possible drawbacks of trying to increase the number sold Whilst these methods may increase revenue there are problems: Increasing promotion -> Adding value -> Reducing the price ->

19. Decreasing costs What are the two types of costs? ___________ costs and _________ costs So, to decrease costs we could __________ fixed costs or variable costs (or both)

20. Decreasing variable costs How could we decrease variable costs and what are the possible problems? 1. BUT 2. BUT

21. Decreasing fixed costs How could we decrease fixed costs and what are the possible problems?

22. Common errors What is wrong with the following? 1. Fixed costs are costs that never change 2. Firm A has fixed costs of £500 and variable costs of £5 per unit so their total costs will be £505.

23. Summary questions 1. Identify two variable and two fixed costs of running a car wash. 2. Firm X has variable costs per unit of £5. Revenue is £12,000 earned by selling 1000 units. If they made £2000 profit, what are their fixed costs?