Revenue, Profit & Loss (OCR GCSE Business)

Revision Note

Written by: Lisa Eades

Reviewed by: Steve Vorster

Revenue

Revenue is the value of items sold by a business over a period of time
Revenue is calculated using the formula

$Revenue = Selling price \times Quantity sold$

Revenue usually increases as sales volume increases

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 4,275 tonnes to gardening businesses for £123.95 per tonne.

Calculate Fotherhill Organics revenue for 2022. [3 marks]

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

39,264 x £8.75 = £343,560 [1]

Step 2: Calculate the revenue from sales to gardening businesses

4,280 x £123.95 = £530,506 [1]

Step 3: Add the two revenue figures together

£343,560 + £530,506 = £874,066 [1]

Ways to Increase Revenue

Revenue can be increased by selling more items or, in some cases, by raising selling prices

Increasing Revenue

Method	Explanation
Sell more items	Selling more items can lead to an increase in revenue, as long as the selling price is not reduced Businesses may sell more items by: Engaging in more promotional activity, such as advertising Seeking new outlets to increase product availability, such as online selling Selling a wider range of products Repackaging products to improve their appeal to customers
Raise the selling price	Raising prices can lead to increased revenue, as long as it has a minimal effect on the volume of items sold If products have few rivals or are essential, a price rise is likely to lead to greater revenue If consumer incomes are squeezed, even small increases in price can have a significant impact on the number of items purchased This would lead to a fall in revenue In this instance, a price cut would be more likely to increase revenue

Method

Explanation

Sell more items

Selling more items can lead to an increase in revenue, as long as the selling price is not reduced
Businesses may sell more items by:
- Engaging in more promotional activity, such as advertising
- Seeking new outlets to increase product availability, such as online selling
- Selling a wider range of products
- Repackaging products to improve their appeal to customers

Raise the selling price

Raising prices can lead to increased revenue, as long as it has a minimal effect on the volume of items sold
If products have few rivals or are essential, a price rise is likely to lead to greater revenue
If consumer incomes are squeezed, even small increases in price can have a significant impact on the number of items purchased
- This would lead to a fall in revenue
- In this instance, a price cut would be more likely to increase revenue

Examiner Tips and Tricks

Although you do not need to demonstrate knowledge of price elasticity of demand, showing that you recognise raising prices may not always lead to an increase in revenue can improve your analysis.

Profit and Loss

Profit is the surplus that remains after business costs have been subtracted
Most businesses have the main objective of making a profit
- Profits help new businesses 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

Gross profit

Gross Profit is the difference between revenue and the costs directly related to production
It is calculated using the formula:

$Gross profit = Revenue - Cost of sales$

Worked Example

Zipmove, an e-scooter manufacturer sells its products to retailers for £180 per unit. The variable costs for each scooter are £72. Monthly fixed costs are £82,000. It sold 2,200 scooters in June.

a. Calculate Zipmove's gross profit for June. [3 marks]

Step 1: Calculate Zipmove's revenue for June

$Revenue = Selling price \times Quantity sold$

$= £ 180 \times 2, 200 scooters = £ 396, 000$ [1]

Step 2: Calculate Zipmove's total variable costs for June

$Total variable costs = Variable cost per unit \times Quantity sold$

$= £ 72 \times 2, 200 scooters = £ 158, 400$ [1]

Step 3: Calculate Zipmove's gross profit for June

$Gross profit = Revenue - Cost of sales$

$= £ 396, 000 - £ 158, 400$ [1]

= £237,600

Net profit

Net profit is the difference between gross profit and the indirect expenses of the business
It is calculated using the formula:

$Net profit = Gross profit - Expenses$

Worked Example

Zipmove, an e-scooter manufacturer sells its products to retailers, In June it made gross profit of £237,600. Its expenses totalled £82,000.

a. Calculate Zipmove's net profit for June. Round the answer to the nearest £1000. [2 marks]

Step 1: Subract Zipmove's fixed costs from its gross profit

$Net profit = Gross profit - Expenses$

$= £ 237, 600 - £ 82, 000 = £ 155, 600$ [1]

Step 2: Round the answer to the nearest £1,000

£155,600 rounds up to £156,000 [1]

Profit can be increased using the following strategies:
- Increasing revenue
- Reducing costs
- A combination of increasing revenue and reducing costs

Making a loss

If costs are greater than revenue, a business makes a loss
- In the short term, or when it first starts up, a business may be able to survive, even if it makes a loss
- In the longer term, business owners may choose to wind up a loss-making enterprise

The Impact of Making a Loss

Impact	Explanation
Lack of finance to grow	A loss-making business will not be able to make use of retained profit to fund activities or grow Lenders are unlikely to risk granting loans or other forms of credit to unprofitable businesses Loss-making businesses are usually unattractive to investors
Need to cut costs	Loss-making businesses often reduce spending on areas such as staffing, promotional activity and market research This can affect a business's ability to recover from a loss and impact worker motivation
Need to raise income	Selling assets can provide funds to clear debts in the short-term There may be a negative impact on longer-term costs if assets need to be replaced through leasing Raising selling prices could increase sales revenue, as long as customers remain loyal to the business

Last updated: 26 June 2024

You've read 0 of your 10 free revision notes

Unlock more, it's free!

Join the 100,000+ Students that ❤️ Save My Exams

the (exam) results speak for themselves:

Did this page help you?

Previous:Business CostsNext:Profitability Ratios

Revenue, Profit & Loss (OCR GCSE Business)

Revision Note

Revenue

Worked Example

Ways to Increase Revenue

Examiner Tips and Tricks

Profit and Loss

Gross profit

Worked Example

Net profit

Worked Example

Making a loss

You've read 0 of your 10 free revision notes

Unlock more, it's free!

Join the 100,000+ Students that ❤️ Save My Exams

Author: Lisa Eades

Author: Steve Vorster