Topic 1.3 Costs, Revenue & Profit

Revenue and Costs “Revenue” is income earned by a firm when they sell either the goods it makes or the services it offers. Money received from customers is called sales, sales revenue or turnover. “Costs” are all the types of expenditure that a firm has when it first starts up and when it is operating on a day-to-day basis.

Start-up and Running Costs Start-up Costs Costs that a firm needs to pay out before it is able to start selling its goods or services. eg: Purchase of machinery; equipment; vehicles; furniture; installation of electricity, telephone; market research Running Costs Costs that a business needs to pay out for in its day-to-day operations. eg: Paying wages, telephone bill, buying stock Some costs could be both: eg buying initial supplies of stock and ordering regular supplies of stock each week.

Start-up and Running Costs Place the following costs into the correct column: Market research before the firm opens Rent Insurance policy for the business Buying supplies every week Wages paid to cleaners Buying a cupboard to store shampoo Advertising the opening of a shop Paying for a shop front sign Fitting sinks in a hair salon Refreshments for customers Start-up Costs Running Costs

… a start-up cost … a running cost A cost that a firm has to pay before it is able to sell its goods is called … … a start-up cost A cost that a firm has to pay during its day-to-day operations is called … … a running cost

Start-up cost or running cost? Advertising the opening of a new shop Start-up cost Buying weekly supplies of sweets for a tuck shop Running cost Paying a loan repayment every month Paying suppliers every week Taking insurance for a business

Fixed and Variable Costs Fixed Costs Costs that DO NOT change when the level of output changes. Fixed costs stay the same whether a firm is producing 100 units or 1,000 units. Fixed costs still have to be paid even if nothing is produced. eg: rent, rates, insurance, wages, leasing equipment, electricity bill Variable Costs Costs that DO change when the level of output changes. The more that is produced, the more of these items have to be purchased. eg stock, raw materials, refreshments for customers, fuel for cooking beef burgers. Would the item be paid for if nothing was produced? If yes, it is a FIXED COST

Fixed and Variable Costs Place the following costs in the correct column: Annual license to sell burgers Burger supplies Insurance for the burger bar Wages Drinks to sell customers Fuel for cooking burgers Fitting the gas cookers Packaging for burgers Council tax Rent Straws for drinks Serviettes Fixed Costs Variable Costs

Gorgeous Gateaux: Revenue Revenue is the money received from customers. For example, a farmer selling their crops; a shop selling goods; an insurance company selling insurance; a travel agent selling a holiday; a supermarket selling food; a factory selling the cars they make. Gorgeous Gateaux will receive revenue when they sell their cakes to their customers. If they sold 20 cakes at £5 each, they would receive revenue of £100. If they sold 50 cakes at £4 each, they would receive revenue of £200. If they sold 100 cakes at £6 each, they would receive revenue of £600.

Sales Revenue for Gorgeous Gateaux Price Number sold Total Revenue January £5 400 £ February March 500 April May 600 June July August 550 September October £6 November December 650 Total revenue for the 12 months: 2000 2000 2500 2500 3000 3000 3000 2750 2750 3000 3600 3900 34,000

Gorgeous Gateaux: Fixed and Variable Costs Fixed costs do not change when the level of output changes. If Gorgeous Gateaux produced no cakes, they would still have to pay their fixed costs. eg Rent Variable costs do vary with output. These costs will increase when more cakes are produced. eg cake ingredients

Gorgeous Gateaux Costs Fixed Costs per year: Wages: £18,000 Rent: £1,000 Insurance: £2,000 Variable Costs per year: Ingredients £5,000 TOTAL COSTS PERYEAR: £26,000

Calculating Profit Total revenue - Total costs Gorgeous Gateaux: Total Revenue: £34,000 Total Costs: £26,000 Profit: £34,000 - £26,000 = £8,000