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IGCSEBusinessEdexcelRevision Notes3. Business FinanceCosts & Break Even AnalysisRevenue, Costs & Profit

Revenue, Costs & Profit (Edexcel IGCSE Business)

Revision Note

Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Revenue

  • Revenue is the value of the units sold by a business over a period of time

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

  • Revenue is calculated using the formula

begin mathsize 16px style Revenue space equals space Quantity space sold space straight x space Selling space price end style
 

  • Revenue usually increases as the sales volume increases

  • Revenue should not be defined as 'money earned' as businesses can receive earnings from investments such as savings

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]


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

39,264 x £8.75        =        £343,560       [1 mark]
 

Step 2: Calculate the revenue from sales to gardening businesses

4,280 x £123.95       =        £530,506    [1 mark]
 

Step 3: Add the two revenue figures together

   £343,560 + £530,506            =       £874,066            [1 mark]

Examiner Tips and Tricks

You may be required to calculate the average selling price using the revenue figure

In these instances you need to divide the sales revenue by the number of items sold

Fixed Variable & Total Costs

  • In preparing goods/services for sale, businesses incur a range of costs

    • Some examples of these these costs include purchasing raw materials, paying staff salaries and wages, and paying utility bills such as electricity  
       

  • 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 + variable costs 

Sketches Which Represent the Different Types of Cost

Type of Cost

Diagram

Explanation

Fixed Cost (FC)

3-7-1-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 Cost (VC)

3-7-2-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 Cost (TC)

_ZxiGabU_3-7-2-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

Worked Example

Fotherhill Organics Limited sold 43,539 packs of its specialist compost to mail-order customers in 2022. The cost to make and deliver each pack was £3.40. In addition, it incurred total fixed costs of £430,000

Calculate Fotherhill Organics total costs for 2022 [2]


Step 1: Calculate the total variable costs of compost

equals 43 comma 539 space cross times space £ 3.40 equals space £ 148 comma 033      [1 mark]
 

Step 2: Add total variable costs to total fixed costs

equals space £ 148 comma 033 space plus space £ 430 comma 000 equals space £ 578 comma 033     [1 mark]

Profit & loss

  • Profit is a surplus that remains after business costs have been subtracted

    • If costs exceed revenue the business makes a loss

  • Most businesses have the main objective of making a profit

    • Profits help new businesses to 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 

  • The most simple formula for calculating profit is:

begin mathsize 16px style Profit space equals space Revenue space minus space Total space Costs end style

Diagram to show how Profit is made

Diagram to show how a profit is made

  • Profit can be increased using the following strategies

    • Increasing revenue 

    • Reducing costs

    • A combination of increasing revenue and reducing costs

Worked Example

In 2022 Fotherhill Organics Limited achieved revenue of £874,066 from sales of its specialist compost. In addition, it incurred total costs of £578,033

Calculate Fotherhill Organics profit for 2022 [1]


Step 1: Subtract total costs from revenue

equals £ 874 comma 066 space minus space £ 578 comma 033 equals space £ 296 comma 033        [1 mark]
 

Examiner Tips and Tricks

When you answer calculation questions remember

  • Take care that your figures are easily recognisable - in some cases the number 4 and the number 9 could be confused by the examiner

  • Check the number of decimal places or significant figures required - if you only give  your answer to one decimal place rather than two you will lose a mark, even if your answer is correct

  • Place your final solution on the dotted line at the bottom of the answer box

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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.