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. 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. 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. 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. 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. 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. 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. 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. 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
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. 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. 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. 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. 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
18. Past paper questions
Tackle the following past paper questions:
-2009 June
- 2010 June
- 2011 January
- 2012 January
19. Topic summary
Use your textbook and the handouts to
create a mind map summary of the key points
of this topic
