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Revenue, Profit & Loss (OCR GCSE Business)

Revision Note

Lisa Eades

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 space equals space Selling space price space cross times space Quantity space 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

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 space profit space equals space Revenue space minus space Cost space of space 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 space equals space Selling space price space cross times space Quantity space sold

equals space £ 180 space cross times space 2 comma 200 space scooters equals space £ 396 comma 000 [1]

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

Total space variable space costs space equals space Variable space cost space per space unit space cross times space Quantity space sold

equals space £ 72 space cross times space 2 comma 200 space scooters equals space £ 158 comma 400 [1]

Step 3: Calculate Zipmove's gross profit for June

Gross space profit space equals space Revenue space minus space Cost space of space sales

equals space £ 396 comma 000 space minus space £ 158 comma 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 space profit space equals space Gross space profit space minus space 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 space profit space equals space Gross space profit space minus space Expenses

equals space £ 237 comma 600 space minus space £ 82 comma 000 equals space £ 155 comma 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

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    Author
    Reviewer
    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.