3.

3 - Costs and Revenues

How do businesses calculate their profit?

Key Vocabulary:
- Sales Volume:
- The quantity (volume) of sales made by a business.
- Ex: if Toyota sold 14 million cars, then their sales volume is 14 million.
- Sales Revenue:
- Income a business receives from sales.
- Sales Revenue = Sales Price X Units Sold
- Synonyms:
- Turnover
- Income
- Cash inflow
- Gains
- Sales revenue also forms part of a business's ‘receipts’
- Total Costs:
- The total expenses of cash outflow of a business.
- Total Costs = Total Fixed Costs + Total Variable Costs
- Synonyms:
- Expenses
- Cash outflow
- Costs
- Overheads
- Payments
- Fixed Costs:
- Are constant and do not change depending on a business’s output.

-
- Example:
- Rent is an example of a fixed cost.
- The business will pay the $1200 rent each month regardless of the number
of products they sell.
- The cost of rent may increase or decrease, bit this change will not be
influenced or controlled by the business.
- Variable Costs:
- Varies depending on the level of output.
 -
- Example:
- Raw materials are an example of a variable cost.
- The business will need to buy more materials if they sell more products.
- The more units sold, the higher the variable costs will be to purchase the
materials to produce those products.
- If sales dip, the business will purchase less raw materials, reducing the cost.

Fixed vs Variable Costs:

Sort the costs below into a table of fixed and variable costs:

Fixed Costs Variable Costs

Advertising costs Ingredients

Furniture (ex: office tables and chairs) Packaging (food wrapping)

Rent (of commercial premises) Utility bills (ex: gas, water, and electricity)

Salaries for managers and permanent staff Wages for part-time employees

Capital equipment (ex: machinery, vehicles)

Office Supplies

- Direct Costs:
- Costs that can be linked to the production of a product.
- Most direct costs are also variable costs, however, there are some instances where a
fixed cost is a direct cost.
- For example with a taxi driver, their motor insurance is a direct, fixed cost.
- Examples of direct costs:
- Labour
- Materials
- Indirect Costs:
- Costs that cannot be linked to the production of a product.
- Indirect costs are all remaining costs that are not linked with the manufacturing of
the products.
 - They are often referred to as overheads.
- Examples of indirect costs:
- Rent
- Utilities
- General office expenses

Net profit:
- The amount of sales revenue that remains after the costs have been deducted.
- Net Profit or Loss = Sales Revenue - Total Costs
- If the total costs are greater than the sales revenue, the business will make a loss.
- This will risk financial loss for the entrepreneur.
- Synonyms:
- Net cash flow
- Net income
- Profit
- Net gains

Practice Questions:
1.

- Annual FC = $1.2 million

- Annual Output = 150,000 customers
- VC/customer = $15
- Total Annual Costs = 1,200,000 + (150,000*15) = $3,450,000
2.

- Annual FC = $2 million
- Annual Output = 1,250,000 units
- VC/unit = $2
- Total Annual Costs = 2,000,000 + (1,250,000*2) = $45,000,000
3.

- Monthly FC = $1 million
- Annual Output = 150,000 units
- VC/unit = $150
- Total Annual Costs = (12*1,000,000) + (150,000*150) = $34,500,000
 Calculating Revenue, Costs and Profit:
Complete the table:
January February March April May June July August September

Units 100 120 120 125 140 160 175 190 300
Sold (593.75/ (651/4.6 (720/4.50 (855/4.50)
4.75) 5) )

Sales £5 £5 £4.75 £4.75 £4.65 £4.50 £4.50 £4.50 £3.99

Price (1197/300)

Sales £500 £600 £570 £593.75 £651 £720 £787. £855 £1,197
Revenue (100*5) (120*5) (120*4.75) 5
(175*
4.50)

Fixed £80 £80 £80 £80 £80 £80 £80 £80 £80
Costs

Variable £100 £120 £120 £100 £110 £115 £120 £140 £170 (250-
Costs (180-80) (190-80) (195-80) (220-80) 80)

Total £180 £200 £200 £180 £190 £195 £200 £220 £250
Costs (80+100) (80+120) (80+120) (1197-250)

Net £320 £400 £370 (570- £413.75 £461 £525 £587. £635 £947
Profit (500-180) (600-200) 200) (593.75- (651-190) (720-195) 5
180)

- What has happened to the number of units sold by PN Stationary over time?
- Increased.
- How can PN Stationary ensure it sells more units?
- By either increasing prices or increasing advertising costs.
- Why did PN stationary decrease the price of their personalised stationary sets over time?
- To increase the number of units sold per customer.
- What has happened to PN Stationary's fixed costs over time? Why is this?
- Remained the same, as fixed costs are not determined by the company’s output.
- How could PN Stationary lower their fixed costs?
- Find cheaper rent, don’t pay advertising or don’t pay insurance.
- What has happened to PN Stationary's variable costs over time?
- Fluctuated (rose irregularly).
- From January to March, what was the variable cost per unit sold?
- $1 per unit.
- Calculate the variable cost per unit for April:
- <$1 per unit
- Why are PN Stationary's variable costs lower in April, despite them selling more units?
 - Economies of scale (Buying in bulk = Cheaper)

How do Businesses Generate their Revenue?

What calculations do we know?

- Sales Revenue = Sales Price * Units Sold
- Total Costs = Total Fixed Costs + Total Variable Costs
- Net Profit = Sales Revenue - Total Costs

Sales Revenue:
- Income a business receives from sales.
- Sales Revenue = Sales Price * Units Sold
- Synonyms:
- Turnover
- Income
- Cash inflow
- Gains
- Sales revenue also forms a part of a business's receipts’
- Without a steady sales revenue, the business will not have enough cash to pay for its costs.
- The business needs capital to survive.
- Entrepreneurs need to predict or forecast their sales revenue to ensure they can cover all of
their costs and continue to make a profit.
- There are only two ways to increase sales revenue:
- Increase the number of units sold.
- Increase the sales price of the product.

How can a business increase sales revenue?

1) Increase the number of units sold:
- Advertising the products to customers.
- Adapt the product to meet different customer needs.
- Decrease the sale price of the product.
- Sell the products using e-commerce.
- Expand the business’s product portfolio.
2) Increasing the sales price of the product:
- Ensure the product has high quality.
- Develop a brand.
- Develop a USP (Unique Selling Point).
- Make the product convenient for customers to purchase.
- Target high income customers by developing premium products.
Revenue Streams:
- A business can generate sales revenue by offering different types of products or selling
products at different locations.
- For example:
- A bakery can generate sales revenue from each of the following:
- Selling cakes in a store.
- Selling event cakes online.
- Selling cakes to local cafes for resale.
- The sales revenue from each is known as a revenue stream or an income.

Exercise:
Calculate “Bake Me Happy's” revenue from each income stream, for the week, below:
- Cakes sold in-store:
- 172 x Cupcakes at £0.79 each.
- 98 x Muffins at £1.29 each
- 37 x ‘Luxury slices’ at £1.99 each.
- Selling event cakes online:
- 2 x Small cake orders at £19.99 each.
- 6 x Medium Cake orders at £24.99 each.
- 4 x Large cake orders at £29.99 each.
- 1 x Wedding cake order at £49.99 each.
- Cakes sold to local cafés for resale:
- 60 x ‘Luxury Slices’ at £1.49 each.

1) What is the total revenue for the week for Bake Me Happy?
Total revenue for the week for Bake Me Happy:
£335.93 (in-store sales) + £359.87 (online sales) + £89.40 (sales to local cafés) = £785.20
2) What % of sales revenue comes from each income stream?
- Percentage of revenue from in-store sales:
- £335.93 / £785.20 * 100 ≈ 42.8%
- Percentage of revenue from online sales:
- £359.87 / £785.20 * 100 ≈ 45.8%
- Percentage of revenue from sales to local cafés:
- £89.40 / £785.20 * 100 ≈ 11.4%
3) Which income stream is the most important? Justify your answer.
- Based on the calculations, the income stream with the highest percentage of sales revenue
is online sales, accounting for approximately 45.8% of the total revenue.
- This indicates that online sales are the most important income stream for Bake Me Happy in
terms of generating revenue.
- This is likely because online sales have a wider reach and may attract customers beyond the
local area, thereby increasing sales potential compared to in-store and local café sales,
which are more limited in scope.

Research Activity:
Select a business, or entrepreneur. Identify their different income streams.
Challenge: Explain why do they have different streams?
- Kanye West:
- He has multiple income streams, including:
- Music sales
- Concert tours
- His own fashion brand
- Endorsement deals
- Production/songwriting
- Investments
- These streams provide:
- Financial stability
- Leverage his brand and influence
- Maximise revenue potential
- Allow for creative expression and entrepreneurship.
- By diversifying, he mitigates risk and taps into various markets, audiences, and
opportunities.