Sales, Revenue & Costs (Edexcel A Level Business)

Revision Note

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Calculation of Sales Volume & Sales Revenue

  • Sales volume is the number of units sold by a business

    • E.g. the number of Harry Styles album download purchases

  • Sales Revenue is the value of the units sold by a business

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

    • Sales revenue is a key business performance measure and must be calculated to identify profit

    • Sales revenue is calculated using the formula

Sales space revenue space equals space Selling space price space straight x space number space of space units space sold 

  • Sales revenue usually increases as the sales volume increases

  • When a firm sells one product it is easy to calculate the sales revenue

    • The more products a firm sells, the harder it is to calculate the sales revenue

    • Computer systems make it easier to track sales revenue when multiple products are sold by the business

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 sales revenue for 2022? (3)


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

39,264 x £8.75        =        £343,560       (1 mark)
 

Step 2 - Calculate the sales revenue from sales to gardening businesses

4,280 x £123.95       =        £530,506    (1 mark)
 

Step 3 - Add together the two sales revenue figures

   £343,560 + £530,506            =       £874,066            (1 mark)

An Introduction to Costs

  • In preparing goods/services for sale, businesses incur a range of costs. These costs can be broken into different categories

  1. 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.

  2. 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

  3. Total costs (TC) are the sum of the fixed + total variable costs 

Calculation of Fixed, Variable & Total Costs

  •  Based on the above definitions, we can calculate several different types of costs

  1. Total space costs space left parenthesis TC right parenthesis space equals space total space fixed space costs space left parenthesis TFC right parenthesis space plus space total space variable space costs space left parenthesis TVC right parenthesis

  2. Total space variable space cost space left parenthesis TVC right parenthesis space equals space variable space cost space left parenthesis VC right parenthesis space cross times space quantity space left parenthesis straight Q right parenthesis

  3. Average space total space cost space left parenthesis A straight T C right parenthesis space equals space fraction numerator total space cost space left parenthesis ATC right parenthesis over denominator quantity space left parenthesis straight Q right parenthesis end fraction

  4. Variable space cost space per space unit space open parentheses AVC close parentheses space space equals space fraction numerator Total space variable space costs space left parenthesis TVC right parenthesis over denominator quantity space left parenthesis straight Q right parenthesis end fraction

  • The average total cost is the cost per unit


Cost Calculations Using the Above Formulas Where VC is $60

Output (Q)

FC

TVC = $ 60 space straight x space straight Q

TC = TFC plus TVC

AVC = TVC over straight Q

AC = TC over straight Q

0

200

-

200

-

-

1

200

60

260

60

260

2

200

120

320

60

160

3

200

180

380

60

126.67

4

200

240

440

60

110

5

200

300

500

60

100

6

200

360

560

60

93.33

7

200

420

620

60

88.57

8

200

480

680

60

85

Variable costs per unit

  • Variable costs per unit are calculated by adding together the cost of each component or raw material used to produce the unit

Worked Example

Rosebud Aromas manufactures luxury scented candles. The production of each candle incurs the following variable costs

Variable Cost

£ per Candle

Wax

0.14

Perfume oil

0.72

Telephone bill

24.32

Glass jar

1.46

Outer Packaging

0.33

Calculate the variable cost in £ for each candle. (2)

Step 1 - Identify the variable costs in the list

A telephone bill is classified as a fixed cost so should not be included in the calculation 

Step 2 - Total the variable costs listed

0.14 + 0.72 + 1.46 + 0.33 = 2.65    (1 mark)

Step 3 - Express the answer in £ per Candle

= £2.65                          (1 mark)

Examiner Tips and Tricks

Take care when calculating variable costs per unit, as it is likely that one or more fixed costs will be included in the list as seen above.

Diagrammatic Representation of Costs

Fixed costs

Graph showing fixed costs at $4000, with a horizontal line across output levels. The vertical axis is labelled cost ($) and the horizontal axis is output level.
  • The firm has to pay its fixed costs which do not change, irrespective if the output is 0 or 100,000 units

  • The fixed costs for this firm are $4,000

Variable costs

Graph showing total variable costs with cost on the vertical axis and output level on the horizontal axis. A red line indicates increasing costs.
  • The variable costs initially rise proportionally with output, as shown in the diagram

  • At some point, the firm will benefit from a purchasing economy of scale and the rise will no longer be proportional

Total costs

Graph showing cost analysis with three lines: fixed cost (horizontal), variable cost (upward sloping), and total cost (above variable cost).
  • The total cost is the sum of the variable & fixed costs

  • The total costs cannot be 0 as all firms have some level of fixed costs

Average total costs

Graph showing average total cost curve, descending then rising, with costs on y-axis, output level on x-axis, and points marked at 'a' and 'b'.
  • As a firm grows, it can increase its scale of output generating efficiencies that lower its average total costs (AC) of production

  • These efficiencies are called economies of scale 

  • As a firm continues increasing its scale of output, it will reach a point where its average total costs (AC) will start to increase

  • The reasons for the increase in the average costs are called diseconomies of scale

Contribution

  • Contribution refers to a product’s selling price minus the variable costs directly involved in producing that unit
     

  • Contribution can be calculated using the following formula:

Contribution space equals space Selling space price space per space unit space minus space variable space cost space per space unit

  • It is called contribution as this amount contributes towards paying off the fixed costs of the business

    • Once the fixed costs have been paid off, then the contribution starts to contribute to the profits of the business

  • The contribution calculation is used to calculate the Break Even Point

Worked Example

Rosebud Aromas manufactures luxury scented candles. The production of each candle incurs the following variable costs:

Variable Cost

£ per Candle

Wax

0.14

Perfume oil

0.72

Glass jar

1.46

Outer Packaging

0.33

Each candle is sold for an average wholesale price of £15 to retail outlets Calculate the contribution for each candle. (2)

Step 1 - Calculate the total variable costs per candle

£0.14 + £0.72 + £1.46 + £0.33

= £2.65                    (1 mark)

Step 2 - Deduct the total variable costs per candle from the selling price

£15.00 - £2.65

= £12.35                                (1 mark)

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Lisa Eades

Author: Lisa Eades

Expertise: Business Content Creator

Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

Steve Vorster

Author: Steve Vorster

Expertise: Economics & Business Subject Lead

Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.