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# 1.11 calculating costs, revenues and profit

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### 1.11 calculating costs, revenues and profit

1. 1. AS Unit 1: Planning and financing a business
2. 2. Financial planning 1.11 Calculating costs, revenue and profit
3. 3. Learning objectives  By the end of this lesson, you should be able to: 1. Separate business costs into fixed and variable costs 2. Calculate the total cost and total revenue at different levels of output 3. Make a clear distinction between the revenue earned by a business and its profit or loss 4. Explain the meaning and importance of profit
4. 4. 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?
5. 5. Did you calculate the total costs correctly? Box Clever TOTAL COSTS SALES REVENUE PROFIT/ LOSS 1 Box: £7 + £1 = £8 2 Box: £7 + £2 = £9 5 Box: £7 + £5 = £12 10 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?
6. 6. 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?
7. 7. Did you calculate the sales revenue correctly? Box Clever TOTAL COSTS SALES REVENUE PROFIT/ LOSS 1 Box: £7 + £1 = £8 2 Box: £7 + £2 = £9 5 Box: £7 + £5 = £12 10 Box: £7 + £10 = £17 1 Box: £2 = £2 2 Box: £4 = £4 5 Box: £10 = £10 10 Box: £20 = £20 What do you notice about the revenue?
8. 8. 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 = £8 2 Box: £7 + £2 = £9 5 Box: £7 + £5 = £12 10 Box: £7 + £10 = £17 1 Box: £2 = £2 2 Box: £4 = £4 5 Box: £10 = £10 10 Box: £20 = £20 1 Box: - £6 2 Box: - £5 5 Box: - £2 10 Box: £3 What do you notice about the profit/ loss?
9. 9. Definitions Profit the difference between the income of a business (its revenue) and its total costs Revenue the income received by a business from the sale of its products or services total revenue = price per unit sold x number of units sold Price the amount paid by the consumer to purchase one unit of a product
10. 10. Task 1 Calculate 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 = __________________
11. 11. How are costs classified? Fixed costs Costs which are independent of the amount produced and do not change as output change Variable costs Costs which are dependent on the amount produced and which change as output changes
12. 12. Task 2
13. 13. 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
14. 14. Worked example Assume: Output is 1,000 units Fixed costs are £5,000 Variable 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%
15. 15. Question 1 Method: 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
16. 16. Question 2 Method: 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
17. 17. Why is profit so important? Think Write down your reasons. Pair Walk 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. Share In your pair share your ideas with another pair in the group