Sales, Revenue & Costs (Edexcel A Level Business)
Revision Note
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 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
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 + total variable costs
Calculation of Fixed, Variable & Total Costs
Based on the above definitions, we can calculate several different types of costs
The average total cost is the cost per unit
Cost Calculations Using the Above Formulas Where VC is $60
Output (Q) | FC | TVC = | TC = | AVC = | AC = |
---|---|---|---|---|---|
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
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
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
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
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:
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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