1. The Measurement and Importance of Profit

2. The measures and importance of profit: Revenue
Revenue (also known as turnover and sales) is the money received from sales of goods or services
Total revenue = selling price x number of items sold
For example: If an ice cream kiosk has sales of 1,115 ice creams a month at a selling price of £2 what would revenue be?
Answer: Total revenue = £2 x 1,115 = £2,230
The owner is considering changing his price. What would happen to his revenue if he cut his price to £1.50.
Answer: Total revenue = £1.50 x 1,115 = £
Is this accurate?

3. The measures and importance of profit: Types of costs
Fixed costs: Costs that do not change directly with the level of output.
They will increase as a firm grows, for example rents a larger store, but will not go up by a set amount for each new unit made.
For example:
Output: 50 smoothies per week
Rent for stores:
£1,000 per month
Output: 250 smoothies per week
Rent for stores:
£1,000 per month

4. The measures and importance of profit: Types of costs
Variable costs: Costs that change directly with output. They will increase by a set amount each time a new unit is made.
For example:
Total costs = total fixed costs + total variable costs
Output: 20 sandwiches a day
Variable cost of raw materials (lettuce, ham, bread etc.): £1 per sandwich
Total variable costs = £20 a day
Output: 40 sandwiches a day
Variable cost of raw materials (lettuce, ham, bread etc.): £1 per sandwich
Total variable costs = £40 a day

5. Costs: Activity
Task: Classify each of the costs below as either a fixed or variable cost.
Purchasing raw materials
Salaries (money paid to workers per year, paid out each month)
Expenditure on advertising
Staff wages paid to labour directly involved in making the good (an amount paid to workers per hour)
Paying rent on a retail outlet
Power (electricity used to power the business)
Purchasing a vehicle
Insurance payments on vehicles owned

6. Costs activity: Answer
Task: Classify each of the costs below as either a fixed or variable cost.
Purchasing raw materials
Variable
Salaries (money paid to workers per year, paid out each month)
Fixed
Expenditure on advertising
Staff wages paid to labour directly involved in making the good (an amount paid to workers per hour)
Paying rent on a retail outlet
Power (electricity used to power the business)
Variable*
Purchasing a vehicle
Insurance payments on vehicles owned
*However it could also be seen as fixed. For example, a factory could be running for 24 hours a day. In the exam it will be made clear as either a cost per unit (variable) or a cost per day/month/year, i.e. a fixed amount for a certain period of time (fixed).

7. The measures and importance of profit:
Profit: the difference between total revenue and total costs. The money that is left from sales once all costs have been paid.
Profit = total revenue – total costs
For example: If a bar had revenue of £10,500 a week and total costs £5,400. What would be its profit?
Answer: Total profit = £10,500 - £5,400 = £5,100

8. Why is profit important?
To be reinvested into the firm
To keep owners/shareholders happy
To help attract new shareholders to invest
To help obtain investment and bank loans
To pay taxes
To avoid share prices drops and potential hostile takeovers

9. Example business: Jaguar Land Rover (JLR)
Taken from the Jaguar Land Rover website:
We have set some ambitious plans for the future. We also recognise that we operate in a resource-constrained world. So we are evolving our business to adapt to these challenges, nurturing the resources and communities on which we depend.
We aim to: 
Demonstrate leadership in sustainable business practices in all our activities across the world
Create products that meet our future customers’ needs with less environmental impact
Inspire future generations with the potential of technology; advancing knowledge and developing a more sustainable way of living
Become a leader in sustainable social development which improves lives, in our local and global communities
Engage our people, customers and partners in our Responsible Business vision
Video:

10. Exam-style question Exam tip:
Explain one reason why it is important for a business that is expanding into new markets to record a profit. (6 marks)
Analyse two benefits of setting clear business objectives for a new start-up business. (9 marks)
Is maximising profit always the most important objective for large well-known businesses whose activities are reported regularly in the media? Justify your view. (16 marks)
Exam tip:
Although it may help you get an answer started, it is often not necessary to start answers with a definition.
It is better to write accurate points using key terms, strong application and analysis.
It may be better to start by stating your judgement and then use your points to support your answer, although this will require you to plan your answers first.

11. Summary Objectives give firms clear direction and focus
They enable a firm to set its priorities and drive it to be successful
They motivate staff and ensure that they act in the interest of the business
They are also important to be able to measure success; to see if they have been achieved
However, objectives must be SMART to be effective.