1. Business revenue, costs and profit

2. Business revenue, costs and profit
This section covers the following:
Revenue and how to calculate it
Costs
Profit and how to calculate it

3. Key words
Revenue
Total value of sales made within a set period of time, e.g. a month
Total costs
All costs for a set period of time, e.g. a month
Fixed costs
Costs that don’t vary just because output varies, e.g. rent
Variable costs
Costs that vary as output varies, e.g. raw materials
Interest
Charges made by banks for the cash they have lent to a business, e.g. six per cent per year
Profit
Difference between revenue and total costs – a negative figure means business is making a loss

4. Total value of sales made within a set period of time, e.g. a month
Key words
Revenue (SPxQ)
Total value of sales made within a set period of time, e.g. a month

5. How to calculate revenue
Revenue is the amount of money a business makes from selling its products. It is the number of sales multiplied by the price of each product. Formula Revenue = quantity × price
Example of calculating revenue iPhone cases sold in a week = 100 Price of each iPhone case = £10 Revenue = quantity × price What is the revenue? Revenue = 100 × £10 Revenue = £1,000

6. Revenue and price
Price is the amount a customer is charged for a product.
Businesses cannot always control the price of their product when:
prices change due to supply and demand, e.g. gold prices
competition is fierce, e.g. cheap air travel
launching a new product, e.g. PS4 launched at £349 but now costs £250.

7. Quantity (demand)
Demand for a product can be predicted in some situations, e.g. petrol demand will always be high.
If demand can be predicted accurately the business can be more efficient in ensuring the right quantity is available for customers to buy.
Other products are more difficult to predict in terms of demand.
Example: Umbrella demand is related to rainy weather – how many times have you heard the forecast for a dry day only to find it is raining?
Unpredictable demand is harder for a business to prepare products for.
Umbrellas can be made in large numbers as they do not go out of date.
For food products, this would not be possible, as they go off.

8. What are costs? Cinema popcorn price
Costs are the amount that a business has to spend to make a product?
What is the cost of 100g of raw popcorn?
How much did you pay for popcorn at the cinema?
Is there a big difference between the raw costs and what you pay at the cinema?
Why?
Costs are split into fixed and variable costs.
2015 price 100g raw popcorn = £0.43 Odeon 200g = £ g = £5.15 ÷ 2 = £2.58 £2.58 vs £0.43? Example costs: staff, cooking, machines, cinema rent, advertising, popcorn box

9. Costs that don’t vary just because output varies, e.g. rent
Key words
Fixed costs (FC)
Costs that don’t vary just because output varies, e.g. rent
Variable costs (VC)
Costs that vary as output varies, e.g. raw materials
Total costs (FC+VC)
All costs for a set period of time, e.g. a month

10. What are variable costs?
These are costs that change with the quantity or the product made and sold.
Examples
Raw materials, e.g. potatoes to make crisps
Bought-in components e.g. crisp bags
Energy used in the production process e.g. electricity to cook the crisps

11. What are fixed costs?
Fixed costs do not change when the quantity of the product changes.
Fixed costs normally relate to a period of time rather than production/output.
Examples include:
Salaries/wage bills
Rent and council rates (e.g. for bin collection)
Interest paid on loans
Key term - Interest
Charges made by banks for the cash they have lent to a business, e.g. six per cent per year

12. Estimating costs for a chip shop
Research shows the following for the Fish and Chip shop: Customers per week buying fish and chips: 500 Fixed costs: Rent for Shop each week £600 Variable costs: per fish sold £1 Per portion of chips: sold £0.10
Work out the Total costs for the Fish and Chip shop per week. Fixed costs = £600 Variable costs Fish 500 × £1 = £500 Chips 500 × £0.10 = £50 Total variable costs = £550 Total costs = Fixed costs + variable costs Total costs £600 + £550 = £1,150

13. Estimating costs is critical to business success
Businesses need to do research to establish costs as accurately as possible.
Example: the costs of renting a shop each month or the number of staff that the shop will need to run effectively
Variable costs can be more difficult to work out as they will be based on likely sales.
As long as the costs are accurate and less than the revenue the business should make money.
Try working out the total costs for a fish and chip shop.

14. Key words
Profit (TR-TC)
Difference between revenue and total costs – a negative figure means business is making a loss

15. Profit
Profit is the difference between revenue and costs
The formula is:
Profit = revenue – total costs
Let’s see how the Fish and Chip shop did in our last slide:
The Fish and Chip shop seems to be doing well.
For new businesses profit is difficult to achieve in the beginning.
Examples: lack of customers, costs may be higher than predicted, few people may know about the business.
Sales of fish and chips in first week of trading: 550 portions Cost per portion of fish and chips: £5 Revenue = £5 × 550 = £2,750 Profit = Revenue – total costs Profit = £2,750 – £1,150 Profit = £1,600

16. Summary questions
Write down or discuss the answers to these questions.
If the price of a product is £1 and 50 are sold, what is the sales revenue?
Name one example of a fixed cost.
Name one example of a variable cost.
If fixed costs are £200 and variable costs are £80, what are the total costs?
If total revenue is £300 and total costs are £100, what is the profit?
If total revenue is £500 and total costs £600. What is the answer and what is the correct name for it?