BUSINESS STUDIES

Alexey Grabarnik

Topics• Starting a business• Financial planning• Finance• People in business• Marketing and competitive environment

Financial planning

The quest for profit lies at the heart of the objectives of almost every business.

Profit – the surplus of revenue over total costs

Total revenue• Revenue is the income a firm receives from selling the

product or service that it provides• Total revenue for a firm for any given period can be

calculated by multiplying the selling price by the number of units sold in that period

• Example: price per bag of crisps is 5$, the company sells 1 000 bags. What is its TR?

Costs• Variable costs (VC): a variable cost is one that varies in

direct proportion to output. Variable costs are often expressed per unit produced, i.e. variable cost per unit

• Total Variable Costs (TVC) = VC per unit * Quantity

• Fixed costs (FC): is one that does not change in relation to output

Total costs (TC) = TVC + FC = VC/unit*Q + FC

VC/unit: 50

TFC: 50000 0 100 200 300 400 500 600 700 800 900 10000

2000

4000

6000

8000

10000

12000Costs

TVC

TFC

TC

Number of units

Pri

ce (

$)

Profit• Profit is the excess of revenue over costs. In terms of a

formula, this can be expressed as:

Profit = Total revenue – Total costs =

(Quantity*Price) – (Quantity*VC/unit + FC) =

Q*P – (Q*VC + FC)

Example• Firm A has the following financial data:

Price = 10$; VC/unit = 3; FC = 10,000$; Q = 5,000

What is the firm’s profit?

Example II• Firm B has variable costs per unit of 5$. Revenue is

$12,000 earned by 1,000 units. If they made $2,000 profit, what are their fixed costs?

Why?

Increasing total revenue will boost profit unless costs rise faster

• Selling price: price can be increased, but, for most products, an increase in price will lead to a fall in quantity sold. Therefore, any decision on whether price would increase profit must be linked to the concept of elasticity.

• Number of units sold: a firm seeks to boost the number of units sold perhaps by promoting the product or changing the product in some way

What next?

There are two ways that a firm can choose to use its profit:

• Retain the profit in the business and use it to buy to extra assets

• Pay out the profit to the owners of the business (i.e. dividends)

APPLE INC.The amount of sales generated by a company after the deduction of returns, etc.

The direct costs attributable to the production of the goods sold by a company.

H/W

1. Firm Y makes a profit of $5,000 by selling 1,000 units for $10 each. If fixed costs are $3,000, what are the variable costs per unit? (4 marks)

2. *Draw a graph (TR, FC, TVC, TC) using the following financial information: VC/unit = $5; FC = $3,000; Price = $10 (4 marks)

3. Firm Z has VC/unit = $3, FC = $5000. If the firm sells 1000 units for $9 each, what is its profit?

* For this question you may want to use Excel.