Income earned from selling products. Sometimes called sales, sales revenue or turnover.
Total revenue = Selling price per item x by the quantity of items sold. Revenue = price x quantity or TR = P x Q where TR is total revenue, P is price and Q is quantity
Example: calculate total revenue if 2,000 items priced £30 each are sold. TR = £30 x 2,000 = £60,000
Total cost, fixed cost and variable cost
Total Costs (TC): the amount of money spent by a firm on producing a given level of output. Total costs are made up of fixed costs (FC) and variable costs (VC).
Fixed costs: expenses of production that do not change with output eg rent,machinery, marketing, administration and salaries. Fixed costs are almost always indirect costs and are sometimes called overheads.
Variable costs: expenses of production that do change with output eg components and raw materials.
Variable costs are almost always direct costs.
Total costs = Fixed Costs + Variable Costs or TC = FC + VC. This means FC = TC – VC and VC = TC ‐ FC
Example: calculate total costs if fixed costs are £10,000 and variable costs are £40,000.
TC = FC + VC = £10,000 + £40,000 = £50,000
Average cost and variable cost per unit
Average cost (AC) or unit cost is the cost of producing one item. Average cost is found by dividing total costs (TC) by total output (Q).
Average costs =
Total Cost / Output or AC = TC/Q Example: calculate unit cost if the total cost of making 2,000 products is £50,000. AC = TC/Q = £50,000/2,000 = £25. The unit or average cost of making one product is £25
Variable cost per unit or average variable cost: the cost of making one item ignoring fixed costs and is found by dividing variable cost by the level of output.
AVC = VC / Q Example: calculate unit variable cost if variable cost of making 2,000 products is £40,000. AVC = VC/Q = £40,000/2,000 = £20. The unit variable cost of making one item is £20.
Mark up is found by adding a given percentage to the initial unit cost
Example: calculate the selling price of an item where unit cost = £5 and mark up is 200%. The selling price = unit cost + (unit cost x mark up) = £5 + (£5 x 200%) = £5 + £10 = £15
Put simply profit is the surplus left over from revenue after paying all costs. Profit is found by deducting total costs from revenue. Profit = revenue – total costs
There are two types of profit: gross and net
Gross profit is the surplus left over from revenue after paying all variable costs.
Gross profit = revenue – variable costs or gross profit = sales revenue – cost of sales
Example: calculate gross profit if sales are £60,000 and variable costs are £40,000.
Gross profit = revenue ‐ variable costs = £60,000 ‐ £40,000 = £20,000
Net profit is the surplus left over from revenue after paying both variable and fixed costs
Net profit = revenue – total costs or net profit = gross profit – other expenses
Example: calculate net profit if sales are £60,000 and total costs are £50,000.
Gross profit = revenue – total costs = £60,000 ‐ £50,000 = £10,000
Contribution per unit
Contribution per unit: the difference between the selling price of an item and its unit variable cost.
Contribution per item is found by subtracting the variable costs of making an item from its selling price.
Contribution per unit = selling price per unit – unit variable costs
Example: Calculate the contribution made where selling price is £30 and unit variable cost is £20. Contribution per unit = selling price per unit – unit variable costs = £30 ‐ £20 = £10
Total contribution = contribution per unit x number of items sold
Example: Calculate total contribution where selling price is £50, unit variable cost is £20, and 800 items are sold. Total contribution = contribution per unit x number of items sold = (£50 ‐ £20) x 8,000 = £30 x 800 = £24,000
Break even: the minimum level of units that must be sold for revenue to cover total costs exactly
The break even level of output = fixed costs/contribution per unit
Example: Eg if fixed costs are £10,000 and each unit contributes £10 then the break even output level
= £10,000/£10= 1,000. 1,000 items must be sold for total costs to be covered and neither a profit or
Profit = contribution – fixed costs
Example: Fixed costs: £10,000. Per unit contribution: £10. Calculate profit made selling 800 and 1,400
a) 800 units contribute 800 x £10 = £8,000. Fixed costs = £10,000. A £2,000 loss is made
b) 1,400 units contribute 1,400 x £10 = £14,000. Fixed costs = £10,000. A £4,000 profit is made
Workforce effectiveness & Capacity utilisation
Labour turnover: the proportion of staff leaving an organisation each year.
Labour turnover = number of staff leaving/average number of staff employed x 100
Example: if 12 staff leave a business employing 200 then labour turnover = 12/200 x 100 = 6%
Labour productivity is output per person in a given time period and is found by dividing total output (Q) by the number of workers (L). Labour Productivity = Q/L and can be shown as output per worker or output per hour worked. Productivity is an indicator (measure) of efficiency
Example: if 50 workers produce 10,000 items a day then daily productivity = 10,000/50 = 200 items
Market size, share & growth
Market size: total sales of all the firms in a given market. Market size by value is found by multiplying the number of units sold by price
Example: Firm A sells 2,000 units at £8. Firm B sells 2,500 units at £5.
• Market size by volume = 2,000 units + 2,500 units = 4,500
• Market size by value = (2,000 x £8) + (2,500 x £5) = £16,000 + £12,500 = £28,500
Market share = sales of firm A / total market size x 100
Market growth: the change in the size of a market over time. Found by dividing the change in the size of the market by the old market size.
Market growth = (new market size – old market size) / old market size x 100
Example: if the value of market sales in 2009 of £28,500 rises to £30,000 in 2010 then the market has increases in size by (£30,000 ‐ £28,500) / £28, 500 x 100 = £1,500/£28,500 = 5.3%
Price elasticity & Price elasticity of demand and
Price elasticity of demand (PED) measures the responsiveness of demand to a given change in price
PED = percentage change in demand of good X / percentage change in price of good X.
Example if a 10% fall in price results in a 5% increase in quantity demanded PED = 5%/‐10% = ‐0.5
Revenue = price x quantity or TR = P x Q where TR is total revenue, P is price and Q is quantity.
Income elasticity of demand (YED) measures the responsiveness of demand to a given change in income. YED = percentage change in demand / percentage change in income
Example if a 10% rise in income results in a 25% increase in demanded YED = 25%/10% = 2.5
Luxury items have a positive income elasticity of demand value greater than one. Demand increases by a bigger percentage than the increase in demand