Revenue, Costs & Profit (Edexcel IGCSE Business)

Revenue

Spec point — 3.3.1 · The concept and calculation of: • revenue

Revenue

• Revenue is the value of the units sold by a business over a period of time

  • E.g the revenue earned by Apple Music from sales of music downloads

• Revenue is calculated using the formula

$\mathrm{Revenue}=\mathrm{Quantity} \mathrm{sold}x\mathrm{Selling} \mathrm{price}$

• Revenue usually increases as the sales volume increases

  • It should not be defined as 'money earned' as businesses can receive earnings from investments such as savings

Worked Example Fotherhill Organics Limited sold 39,264 packs of its specialist compost to mail-order customers in 2022. The price per pack was £8.75. In addition, it sold 4,280 tonnes to gardening businesses for £123.95 per tonne.

Calculate Fotherhill Organics revenue for 2022.

[3]

Step 1: Calculate the revenue from sales to mail-order customers

39,264 x £8.75 = £343,560 [1 mark]

Step 2: Calculate the revenue from sales to gardening businesses

4,280 x £123.95 = £530,506 [1 mark]

Step 3: Add the two revenue figures together

£343,560 + £530,506 = £874,066 [1 mark]

Exam Hint You may be required to calculate the average selling price using the revenue figure

In these instances you need to divide the sales revenue by the number of items sold

Fixed, variable and total costs

Spec point — 3.3.1 · The concept and calculation of: • fixed and variable costs • total costs

Fixed, variable and total costs

• In preparing goods/services for sale, businesses incur a range of costs

  • Some examples of these these costs include purchasing raw materials, paying staff salaries and wages, and paying utility bills such as electricity

• These costs can be broken into different categories

  • Fixed costs (FC) are costs that do not change as the level of output changes

    • These have to be paid whether the output is zero or 5000
    • E.g. building rent, management salaries, insurance, bank loan repayments etc.

  • Variable costs (VC) are costs that vary directly with the output

    • These increase as output increases & vice versa
    • E.g. raw material costs, wages of workers directly involved in the production

  • Total costs (TC) are the sum of the fixed + variable costs

Different types of cost

Worked Example Fotherhill Organics Limited sold 43,539 packs of its specialist compost to mail-order customers in 2022. The cost to make and deliver each pack was £3.40. In addition, it incurred total fixed costs of £430,000

Calculate Fotherhill Organics total costs for 2022.

[2]

Step 1: Calculate the total variable costs of compost

$= 43 , 539 \times £ 3.40$

equals space £ 148 comma 033 [1 mark]

Step 2: Add total variable costs to total fixed costs

equals space £ 148 comma 033 space plus space £ 430 comma 000

equals space £ 578 comma 033 [1 mark]

Profit and loss

Spec point — 3.3.1 · The concept and calculation of: • profit and loss.

Profit and loss

• Profit is a surplus that remains after business costs have been subtracted

  • If costs exceed revenue the business makes a loss

• Most businesses have the main objective of making a profit

  • Profits help new businesses to survive and break-even
  • It is a reward for risks taken by entrepreneurs and investors
  • Established businesses can use profit to fund long-term growth

• The most simple formula for calculating profit is:

$\mathrm{Profit}=\mathrm{Revenue}-\mathrm{Total} \mathrm{Costs}$

How profit is made

By adding value firms are in the position to make a profit

• Profit can be increased using the following strategies

  • Increasing revenue
  • Reducing costs
  • A combination of increasing revenue and reducing costs

Worked Example In 2022 Fotherhill Organics Limited achieved revenue of £874,066 from sales of its specialist compost. In addition, it incurred total costs of £578,033

Calculate Fotherhill Organics profit for 2022 [1]

Step 1: Subtract total costs from revenue

equals £ 874 comma 066 space minus space £ 578 comma 033

equals space £ 296 comma 033 [1 mark]

Exam Hint When you answer calculation questions remember

• Take care that your figures are easily recognisable - in some cases the number 4 and the number 9 could be confused by the examiner
• Check the number of decimal places or significant figures required - if you only give your answer to one decimal place rather than two you will lose a mark, even if your answer is correct
• Place your final solution on the dotted line at the bottom of the answer box