The Measurement and Importance of Profit

The measures and importance of profit: Revenue Revenue (also known as turnover and sales) is the money received from sales of goods or services Total revenue = selling price x number of items sold For example: If an ice cream kiosk has sales of 1,115 ice creams a month at a selling price of £2 what would revenue be? Answer: Total revenue = £2 x 1,115 = £2,230 The owner is considering changing his price. What would happen to his revenue if he cut his price to £1.50. Answer: Total revenue = £1.50 x 1,115 = £1.672.50 Is this accurate?

The measures and importance of profit: Types of costs Fixed costs: Costs that do not change directly with the level of output. They will increase as a firm grows, for example rents a larger store, but will not go up by a set amount for each new unit made. For example: Output: 50 smoothies per week Rent for stores: £1,000 per month Output: 250 smoothies per week Rent for stores: £1,000 per month

The measures and importance of profit: Types of costs Variable costs: Costs that change directly with output. They will increase by a set amount each time a new unit is made. For example: Total costs = total fixed costs + total variable costs Output: 20 sandwiches a day Variable cost of raw materials (lettuce, ham, bread etc.): £1 per sandwich Total variable costs = £20 a day Output: 40 sandwiches a day Variable cost of raw materials (lettuce, ham, bread etc.): £1 per sandwich Total variable costs = £40 a day

Costs: Activity Task: Classify each of the costs below as either a fixed or variable cost. Purchasing raw materials Salaries (money paid to workers per year, paid out each month) Expenditure on advertising Staff wages paid to labour directly involved in making the good (an amount paid to workers per hour) Paying rent on a retail outlet Power (electricity used to power the business) Purchasing a vehicle Insurance payments on vehicles owned

Costs activity: Answer Task: Classify each of the costs below as either a fixed or variable cost. Purchasing raw materials Variable Salaries (money paid to workers per year, paid out each month) Fixed Expenditure on advertising Staff wages paid to labour directly involved in making the good (an amount paid to workers per hour) Paying rent on a retail outlet Power (electricity used to power the business) Variable* Purchasing a vehicle Insurance payments on vehicles owned *However it could also be seen as fixed. For example, a factory could be running for 24 hours a day. In the exam it will be made clear as either a cost per unit (variable) or a cost per day/month/year, i.e. a fixed amount for a certain period of time (fixed).

The measures and importance of profit: Profit: the difference between total revenue and total costs. The money that is left from sales once all costs have been paid. Profit = total revenue – total costs For example: If a bar had revenue of £10,500 a week and total costs £5,400. What would be its profit? Answer: Total profit = £10,500 - £5,400 = £5,100

Why is profit important? To be reinvested into the firm To keep owners/shareholders happy To help attract new shareholders to invest To help obtain investment and bank loans To pay taxes To avoid share prices drops and potential hostile takeovers

Example business: Jaguar Land Rover (JLR) Taken from the Jaguar Land Rover website: We have set some ambitious plans for the future. We also recognise that we operate in a resource-constrained world. So we are evolving our business to adapt to these challenges, nurturing the resources and communities on which we depend. We aim to:  Demonstrate leadership in sustainable business practices in all our activities across the world Create products that meet our future customers’ needs with less environmental impact Inspire future generations with the potential of technology; advancing knowledge and developing a more sustainable way of living Become a leader in sustainable social development which improves lives, in our local and global communities Engage our people, customers and partners in our Responsible Business vision Video: http://www.jaguarlandrover.com/gl/en/responsible-business/our-aims/

Exam-style question Exam tip: Explain one reason why it is important for a business that is expanding into new markets to record a profit. (6 marks) Analyse two benefits of setting clear business objectives for a new start-up business. (9 marks) Is maximising profit always the most important objective for large well-known businesses whose activities are reported regularly in the media? Justify your view. (16 marks) Exam tip: Although it may help you get an answer started, it is often not necessary to start answers with a definition. It is better to write accurate points using key terms, strong application and analysis. It may be better to start by stating your judgement and then use your points to support your answer, although this will require you to plan your answers first.

Summary Objectives give firms clear direction and focus They enable a firm to set its priorities and drive it to be successful They motivate staff and ensure that they act in the interest of the business They are also important to be able to measure success; to see if they have been achieved However, objectives must be SMART to be effective.