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Revenue, costs and profit

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Apuntes de la lecciónDiapositivasPreguntas de práctica

Apuntes de la lección

Revenue

  • Sales revenue, or turnover here, = price per item × quantity sold at that price. Add separate revenue amounts where products or prices differ. Production does not create sales revenue until the items are sold.
  • Revenue is not profit and need not equal cash received in the same period. For example, a credit customer can pay later; finance from an owner or lender is not sales revenue.

Costs

  • Total fixed costs do not vary with output in a stated period and relevant range; they can change with time or capacity. Total variable costs change with output. In the simple model, unit variable cost is constant and total variable cost = unit cost × output.
  • Total cost = total fixed cost + total variable cost; average cost = total cost ÷ output, provided output is nonzero. Direct and indirect describe traceability to a cost object, not the same distinction as fixed and variable: an indirect electricity cost may vary with use.

Calculate revenue and total cost

Calculate revenue and total costFictional itemWorkingResultSelling priceGiven£10 per itemVariable costGiven£6 per itemFixed costsGiven£2,000Revenue at 800 sales800 × £10£8,000Variable total at 800800 × £6£4,800Total cost at 800£2,000 + £4,800£6,800

Profit

  • Gross profit = revenue − cost of sales, the cost associated with the items sold. Operating profit = gross profit − other operating expenses in the simplified format. Finance costs and tax can then produce later profit measures.
  • Net-profit terminology differs between specifications and formats. Use the definition or supplied figure in the task. In this lesson’s explicit after-tax example, revenue £100,000 less cost of sales £60,000 gives gross profit £40,000; less operating expenses £20,000, interest £2,000 and tax £3,000 leaves £15,000 profit after tax.

Label each profit subtotal

Label each profit subtotalSeparate fictional annual itemAmountRevenue£100,000Cost of sales£60,000Gross profit£40,000Other operating expenses£20,000Operating profit£20,000Interest£2,000Tax£3,000Profit after tax£15,000

Margins

  • Gross margin = gross profit ÷ revenue × 100; net margin = specified net profit ÷ revenue × 100, with nonzero revenue. £5,000 net profit on £50,000 revenue gives 10%. Margin is a percentage, not a pounds amount or markup on cost.
  • Separate fictional firms: £20,000 net profit on £100,000 revenue gives 20%, while £50,000 on £1 million gives 5%. The lower-margin firm has the greater absolute profit. Use consistent definitions and similar business models when comparing.

Compare both margin and profit

Compare both margin and profitSeparate fictional firmRevenueNet profitNet marginFirm A£100,000£20,00020%Firm B£1,000,000£50,0005%

Break-even

  • Break-even is where total revenue equals total cost and modelled profit is zero. Contribution per item = price − variable cost per item; with positive contribution, break-even sales = fixed costs ÷ contribution. Round fractional thresholds up where only whole items are sold.
  • The fictional graph uses £10 price, £6 unit variable cost and £2,000 fixed costs: revenue = 10q, total cost = 2,000 + 6q, fixed cost = 2,000. The intersection is q = 500 and £5,000. At 800 sales, revenue £8,000 less total cost £6,800 gives £1,200 profit and a margin of safety of 300 items.
  • Margin of safety = actual or budgeted sales − break-even sales in matching units and period. This chart assumes all output is sold. AQA GCSE requires interpreting break-even charts rather than drawing them or using the formula; other boards may require formula calculations.

Break-even sales model

Break-even sales modelO2000400060008000100002004006008001000Items sold (all output sold)Revenue / costs (£)RevenueTotal cost(500, 5000)Fixed cost

Changes

  • With other inputs unchanged, positive fixed costs and positive contribution, a higher price or lower variable cost per item increases contribution and lowers break-even sales. Higher fixed costs raise the threshold; lower fixed costs reduce it. These statements concern the calculation, not guaranteed customer demand.
  • At contribution £4, cutting fixed costs from £2,000 to £1,600 lowers the threshold from 500 to 400 items. Raising price to £11 while variable unit cost remains £6 also gives 400 at the original £2,000 fixed costs. Lowering variable unit cost to £5 at the original £10 price gives the same 400 threshold.

Change one input from the base

Change one input from the baseScenarioFixedcostsUnitcontributionBreak-evensalesBase: £10 price, £6unit cost£2,000£4500 itemsFixed costs fall only£1,600£4400 itemsPrice rises to £11only£2,000£5400 itemsUnit cost falls to £5only£2,000£5400 items

Using data

  • Interpret figures in the business context, show working and units, and distinguish period totals, unit costs, percentages and percentage points. A low gross margin leaves a smaller share of revenue to cover later expenses, but its significance depends on sales scale and the business model.
  • The simple break-even model assumes constant price and variable unit cost and unchanged fixed costs within the relevant range. Actual demand, capacity, bulk discounts, sales mix or stepped costs may differ. Use cash forecasts and other evidence as well; zero accounting profit does not mean zero cash.

Ask what the chart assumes

Ask what the chart assumesModel assumptionQuestion to investigateOne selling priceWill discounts or a price risechange demand?Constant unitvariable costAre there bulk savings or inputprice changes?Fixed costs withinthe rangeWill capacity require anotherpremises or machine?Output is soldCould stock remain unsold?Known sales mixDo products have differentcontributions?

Diapositivas

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Preguntas de práctica

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  1. 1.What is turnover?

    Easy
    • Atotal revenue from sales
    • Btotal costs
    • Cprofit
    • Dtax

  2. 2.What is a fixed cost?

    Easy
    • Aa cost that changes with output
    • Brevenue
    • Cprofit
    • Da total cost that does not vary with output within a stated period and range

  3. 3.What is a variable cost?

    Easy
    • Arevenue
    • Btax
    • Ca cost that changes with output
    • Da cost that never changes

  4. 4.What is total cost?

    Easy
    • Aprofit divided by output
    • Btotal fixed costs plus total variable costs
    • Ctotal fixed costs minus total variable costs
    • Dselling price multiplied by items sold

  5. 5.What is cost of sales?

    Easy
    • Athe cost associated with goods or services sold in the period
    • Bwages of managers
    • Crent
    • Dadvertising

  6. 6.What is gross profit?

    Easy
    • Arevenue plus costs
    • Bnet profit minus tax
    • Cwages minus revenue
    • Drevenue minus cost of sales

  7. 7.In a question defining net profit as profit after finance costs and tax, what does that figure represent?

    Easy
    • Agross profit
    • Bcost of sales
    • Cprofit after all costs, interest and tax
    • Drevenue

  8. 8.What is an overhead?

    Easy
    • Aa wage for production
    • Ban indirect cost not readily traced to a particular product
    • Ca direct material
    • Drevenue

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