Sales Revenue & Costs (Edexcel GCSE Business)

Sales Revenue

• 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

• 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

Costs

• Businesses incur a range of costs 

  • Examples include purchasing raw materials, paying staff salaries and wages and paying utility bills such as electricity 

• These costs can be classified as follows:

  • Fixed costs

  • Variable costs

  • Total costs

Fixed costs

• 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 

  • Examples include rent, management salaries, insurance and bank loan repayments

• Fixed costs can be plotted on a graph as a horizontal line

• The fixed costs for this firm are $4,000 at all levels of output

Variable costs

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

  • These increase as output increases and vice versa

  • Examples include raw material costs and wages of workers directly involved in the production

• Variable costs are plotted on a graph as an upwards sloping line, starting at 0

Total costs

• The total cost is the sum of the variable and fixed costs

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

• Total costs are plotted on a graph as an upwards sloping line, parallel to the variable costs, starting at the level of fixed costs

Cost Calculations

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

Cost Calculations Using the Above Formulas Where VC is £60

Reducing costs

• An important way to improve profit is to reduce costs

  • Fixed costs may be reduced by relocating to cheaper business premises, reducing salaries for workers, spending less on promotional activities or seeking lower-priced utilities providers

  • Variable costs may be reduced by sourcing cheaper materials, buying raw materials and components in bulk or outsourcing distribution and packaging to a third party business 

    • For example, many businesses sell their products via platforms such as Amazon which manages the packaging and shipping of items, usually at a cost much lower than that an independent business can achieve

• Businesses must consider carefully the impacts of reducing costs on customer service, quality and speed of delivery

  • For example, paying lower salaries to staff may mean that employees have fewer customer service skills or experience

  • Cheaper raw materials and components may lead to worsening quality