1.3.2 Sales Revenue & Costs | Edexcel GCSE Business Revision Notes 2019

Sales Revenue

Sales Revenue is the value of the units sold by a business
- E.g the revenue earned by Apple Music from sales of music downloads
- Sales revenue is a key business performance measure and must be calculated to identify profit
- Sales revenue is calculated using the formula

$Sales revenue = Selling price x number of units sold$

When a firm sells one product it is easy to calculate the sales revenue
- The more products a firm sells, the harder it is to calculate the sales revenue
- Computer systems make it easier to track sales revenue when multiple products are sold by the business

Worked example

Moped Maestro's has made the following forecasts for the costs and sales of its mopeds for 2022

	Forecast
Total number of moped sales	3000
Total revenue	£2 200 000
Variable cost per moped	£450
Fixed costs	£180 000

Using the information in the Table, calculate the selling price per bike. You are advised to show your workings. (2)

Step 1 - Insert the appropriate figures into the sales revenue formula

$Sales revenue = Selling price x number of units sold £ 2 200 000 = ? x 3000$ (1 mark)

Step 2 - Rearrange the formula and solve for ?

$Selling price = \frac{£ 2 200 000}{3000} = £ 733.33$ (2 marks for the correct answer)

Exam Tip

In Paper 1, you may be asked to conduct a simple sales revenue calculation where you use the formula as is. Alternatively, you may be asked to calculate the percentage change in sales revenue between two years or to rearrange the formula to calculate any component (as in the example above).

To calculate any percentage change use the formula

$Percentage change = \frac{(new value - old value)}{old value} x 100$

Costs

In preparing goods/services for sale, businesses incur a range of costs. These costs can be broken into different categories

An Explanation of the Different Costs of a Business

Type of Cost

Diagram

Explanation

Fixed Cost (FC)

3-7-1-fixed-costs

Fixed costs (FC) are costs that do not change as the level of output changes
- These have to be paid whether the output is zero or 5000
- E.g. Building rent, management salaries, insurance, bank loan repayments etc.
The fixed costs for this firm are $4,000

Variable Cost (VC)

3-7-2-variable-costs

Variable costs (VC) are costs that change directly with the output
- These increase as output increases and vice versa
- E.g. Raw material costs, wages of workers directly involved in the production

Total Cost (TC)

_ZxiGabU_3-7-2-total-costs

The total cost is the sum of the variable & fixed costs
The total costs cannot be 0 as all firms have some level of fixed costs

Cost Calculations

Based on the above definitions, we can calculate several different types of costs

$Total costs (TC) = total fixed costs (TFC) + total variable costs (TVC)$
$Total variable cost (TVC) = variable cost (VC) \times quantity (Q)$

Cost Calculations Using the Above Formulas Where VC is £60

Output (Q)	FC	TVC = $$ 60 x Q$	TC = $TFC + TVC$
0	200	-	200
1	200	60	260
2	200	120	320
3	200	180	380

Worked example

Rosebud Aromas manufactures luxury scented candles. The production of each candle incurs the following costs

Item	£ per Candle
Wax	0.14
Perfume oil	0.72
Loan repayment	100
Glass jar	1.46
Outer Packaging	0.33

Calculate the variable cost in £ for each candle. (2)

Step 1 - Identify the variable costs in the list

Loan repayment is classified as a fixed cost so should not be included in the calculation

Step 2 - Total the variable costs listed

0.14 + 0.72 + 1.46 + 0.33 = 2.65 (1 mark)

Step 3 - Express the answer in £ per Candle

= £2.65 (2 marks for the correct answer)

Exam Tip

Take care when calculating variable costs per unit as it is likely that one or more fixed costs will be included in the list as seen above.

If you are asked to calculate the total variable costs, follow the above process and multiply the answer by the number of units produced/sold.

Reducing costs

An important way to improve profit is to reduce costs
- Fixed costs may be reduced by relocating to cheaper business premises, reducing salaries for workers, spending less on promotional activities or seeking lower-priced utilities providers
- Variable costs may be reduced by sourcing cheaper materials, buying raw materials and components in bulk or outsourcing distribution and packaging to a third party business
  - For example, many businesses sell their products via platforms such as Amazon which manages the packaging and shipping of items, usually at a cost much lower than that an independent business can achieve
Businesses must consider carefully the impacts of reducing costs on customer service, quality and speed of delivery
- For example, paying lower salaries to staff may mean that employees have fewer customer service skills or experience
- Cheaper raw materials and components may lead to worsening quality

Sales Revenue & Costs (Edexcel GCSE Business)

Revision Note

Sales Revenue

Worked example

Exam Tip

Costs

Cost Calculations

Worked example

Exam Tip

Reducing costs

You've read 0 of your 0 free revision notes

Get unlimited access

Join the 100,000+ Students that ❤️ Save My Exams

Author: Steve Vorster