AS Unit 1:Planning and financing a business

Financial planning1.11 Calculating

costs, revenue and profit

Learning objectivesBy the end of this lesson, you should be

able to:1. Separate business costs into fixed and

variable costs2. Calculate the total cost and total

revenue at different levels of output3. Make a clear distinction between the

revenue earned by a business and its profit or loss

4. Explain the meaning and importance of profit

Box clever is a small company that specialises in creating cardboard packaging. Calculate the following total costs:

Cost of materials One piece of card with box template drawn = £1 Scissors = £5 Glue = £2

Box Clever

How much to make 1 box? How much to make 2, 5 and 10 boxes?

Did you calculate the total costs correctly?

Box Clever

TOTAL COSTS SALES REVENUE PROFIT/ LOSS

1 Box: £7 + £1 = £82 Box: £7 + £2 = £95 Box: £7 + £5 = £1210 Box: £7 + £10 = £17 What did you notice about the cost of the

scissors and glue? What did you notice about the cost of the boxes?

Now that we know how much it will cost to create the boxes, we now need to know how much sales revenue will be earned. Calculate the sales revenue:

Box retail One box will retail at = £2

Box Clever

How much is earned from selling 1 box? How much is earned from selling 2, 5 and 10

boxes?

Did you calculate the sales revenue correctly?

Box Clever

TOTAL COSTS SALES REVENUE PROFIT/ LOSS

1 Box: £7 + £1 = £82 Box: £7 + £2 = £95 Box: £7 + £5 = £1210 Box: £7 + £10 = £17

1 Box: £2 = £22 Box: £4 = £45 Box: £10 = £1010 Box: £20 = £20

What do you notice about the revenue?

Now we know the total costs and sales revenue, how much was the profit/ loss?

Box Clever

TOTAL COSTS SALES REVENUE PROFIT/ LOSS

1 Box: £7 + £1 = £82 Box: £7 + £2 = £95 Box: £7 + £5 = £1210 Box: £7 + £10 = £17

1 Box: £2 = £22 Box: £4 = £45 Box: £10 = £1010 Box: £20 = £20

1 Box: - £62 Box: - £55 Box: - £210 Box: £3

What do you notice about the profit/ loss?

DefinitionsProfit

the difference between the income of a business (its revenue) and its total

costs

Profitthe difference between the income of a business (its revenue) and its total

costs

Revenuethe income received by a business from

the sale of its products or servicestotal revenue = price per unit sold x

number of units sold

Revenuethe income received by a business from

the sale of its products or servicestotal revenue = price per unit sold x

number of units sold

Pricethe amount paid by the consumer to

purchase one unit of a product

Pricethe amount paid by the consumer to

purchase one unit of a product

Task 1Calculate the missing figure in each of the following:

(a) Price per unit = £33 and quantity sold = 25 units.

Total revenue = _________________

(b)Total revenue = £1,260 and quantity sold = 70 units.

Selling price per unit = _________________

(c) Total revenue = £1,840 and selling price per unit = £23.

Quantity sold = __________________

How are costs classified?

Fixed costsCosts which are independent of the amount produced and

do not change as output change

Fixed costsCosts which are independent of the amount produced and

do not change as output change

Variable costsCosts which are dependent on

the amount produced and which change as output changes

Variable costsCosts which are dependent on

the amount produced and which change as output changes

Task 2

Task 2

Place the following costs into one of the boxes below. Be prepared to justify your choice to your table group!

raw materials

power

stationery equipment

property rent

advertising expenditure

wages

Worked example

Assume:

Output is 1,000 unitsFixed costs are £5,000Variable costs are £6,000

1. What happens to total costs if output rises from 1000 to 2000 units?

2. What happens to total costs if output falls by 10%

Question 1Method:

1. Average VC = £6,000 / 1,000 = £6

2. New VC = 2,000 x £6 = £12,000

3. Fixed costs = £5,000

4.Total costs = £17,000

Answer:

Costs have increased but they have not doubled as has output

Question 2Method:

1. Average VC = £6,000 / 1,000 = £6

2. New output = 0.9 x 1,000 = 900

3. New VC = 900 x £6

4. Fixed costs = £5,000

5. Total costs = £10,400

Answer: Costs have decreased but by less than the change in output

Why is profit so important?

ThinkWrite down your

reasons.

PairWalk around the room and share your ideas with

one other person

Profit is the surplus value after sales after costs have been deducted from revenue.

Used as a measure of success. Banks and other lenders are more willing to lend or invest. Reward for entrepreneurs after taking risks. Profit provides further finance that can be reinvested.

ShareIn your pair

share your ideas with another pair

in the group

Past paper questionsTackle the following past paper questions:

-2009 June

- 2010 June

- 2011 January

- 2012 January

Topic summaryUse your textbook and the handouts to create a mind map summary of the key points of this topic

HomeworkRead the Gnomes United case study in your textbook and answer all questions