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Business · Putting a business idea into practice

Revenue, costs and profit

Revenue is the money coming in from sales; costs are the money going out. Profit is what is left when costs are taken from revenue. This lesson covers every calculation you need, including interest on loans.

  • 7 key terms
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Teacher resources

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Student handouts

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Last Lesson

Answer from memory before the answers appear.

  • What is the difference between an aim and an objective?

    An aim is a general long-term goal; an objective is a specific, measurable target.

  • Name three financial aims.

    Any three of: survival, profit, sales, market share, financial security.

  • Name two non-financial aims.

    Any two of: social objectives, personal satisfaction, challenge, independence and control.

  • How do you calculate market share?

    (Business's sales ÷ total market sales) × 100.

Learning Objectives

  1. 1Calculate revenue.
  2. 2Explain and calculate fixed costs, variable costs and total costs.
  3. 3Calculate profit and loss.
  4. 4Calculate interest on a loan as a percentage.

THE BIG IDEA

Profit = revenue - costs. Everything else in this lesson is about getting those two numbers right.

Revenue

Revenue is the money a business receives from selling its products.

  • Formula

    Revenue = sales price × quantity sold.

  • Also called

    Sales revenue, turnover or income.

  • Not the same as profit

    Revenue is all the money coming in, before any costs are paid.

  • Example

    A café sells 3,000 coffees at £4 each: revenue = £4 × 3,000 = £12,000.

Fixed or Variable Costs?

Fixed costs

  • Do not change with the number of products made or sold.
  • Must be paid even if nothing is sold.
  • Examples: rent, salaries, insurance, loan repayments, advertising.
  • Can change over time, e.g. when the rent goes up.

Variable costs

  • Change directly with the number of products made or sold.
  • Are zero if nothing is made.
  • Examples: raw materials, ingredients, packaging, stock.
  • Total variable costs = variable cost per unit × quantity.

Total Costs

Total costs are everything a business spends to make and sell its products.

  • Formula

    Total costs = fixed costs + total variable costs.

  • Total variable costs

    Variable cost per unit × quantity sold.

  • Example

    The café's fixed costs are £6,000 a month and each coffee costs £1.50 to make. Selling 3,000 coffees: total variable costs = £1.50 × 3,000 = £4,500. Total costs = £6,000 + £4,500 = £10,500.

Profit and Loss

Profit = total revenue - total costs.

  • Profit

    When revenue is greater than total costs, the business makes a profit.

  • Loss

    When total costs are greater than revenue, the business makes a loss. A loss is shown as a negative number or in brackets, e.g. -£500 or (£500).

  • Why it matters

    Profit rewards the owner and can be reinvested; losses cannot go on for ever, or the business will fail.

  • Example

    The café's revenue is £12,000 and its total costs are £10,500, so its profit = £12,000 - £10,500 = £1,500.

The Café's Month in Numbers

Work through it in order, and show every step.

A café sells 3,000 coffees at £4 each. Its fixed costs are £6,000 a month and each coffee costs £1.50 to make. Calculate its profit.

  1. 1 Revenue £4 × 3,000 = £12,000
  2. 2 Total variable costs £1.50 × 3,000 = £4,500
  3. 3 Total costs £6,000 + £4,500 = £10,500
  4. 4 Profit £12,000 - £10,500 = £1,500

AnswerProfit = £1,500

The Café's Month at a Glance

  • £12,000

    Revenue

  • £6,000

    Fixed costs

  • £4,500

    Total variable costs

  • £1,500

    Profit

Interest on Loans

Interest is the extra money a business pays back on top of what it borrowed.

  • What it is

    The cost of borrowing - the reward the lender gets for lending the money.

  • Formula

    Interest (%) = (total repayment - borrowed amount) ÷ borrowed amount × 100.

  • A fixed cost

    Interest must be paid whatever the business sells, so it adds to fixed costs and reduces profit.

  • Why it matters

    A high interest rate makes borrowing expensive, so a business may borrow less or look for cheaper finance.

Calculating Interest as a Percentage

Edexcel asks for interest as a percentage of the amount borrowed.

A business borrows £5,000 and repays £5,600 in total. Calculate the rate of interest.

  1. 1 Find the interest paid £5,600 - £5,000 = £600
  2. 2 Divide by the amount borrowed £600 ÷ £5,000 = 0.12
  3. 3 Multiply by 100 0.12 × 100 = 12%

AnswerInterest = 12%

Case study

When Fixed Costs Rise

In 2022 wholesale energy prices rose sharply across the UK. Many small bakeries, which run ovens for hours every day, saw their energy bills rise several times over. Energy is largely a fixed cost for a bakery - the ovens must be heated whether it sells 100 loaves or 1,000 - so higher bills cut straight into profit. Some bakeries raised their prices to protect their profit, some cut their opening hours, and some were forced to close.

2022 Energy prices rise sharply
Profit Falls when fixed costs rise and prices do not

Fixed or Variable?

Match each cost to its type.

  • Rent for the shop

    Fixed

  • Flour for each loaf

    Variable

  • The manager's salary

    Fixed

  • Packaging for each order

    Variable

  • Insurance

    Fixed

  • Stock bought to sell

    Variable

Run the Numbers

A phone case business sells 500 cases a month at £12 each. Its fixed costs are £2,000 a month and each case costs £5 to make. Calculate its revenue, total costs and profit. Then work out what happens to its profit if it sells only 250 cases.

1. Calculate revenue.

2. Calculate total variable costs, then total costs.

3. Calculate profit.

4. Repeat for 250 cases.

A good answer shows: Revenue £6,000, total costs £4,500 and profit £1,500 at 500 cases; revenue £3,000, total costs £3,250 and a loss of £250 at 250 cases.

Can I...?

  1. 1Calculate revenue.
  2. 2Explain fixed costs, with examples.
  3. 3Explain variable costs, with examples.
  4. 4Calculate total variable costs.
  5. 5Calculate total costs.
  6. 6Calculate profit or loss.
  7. 7Calculate interest as a percentage.

Summary & Exam Focus

  • Revenue = price × quantity.
  • Total costs = fixed costs + total variable costs.
  • Profit = total revenue - total costs.
  • Interest (%) = (total repayment - borrowed amount) ÷ borrowed amount × 100.

Exam focus

Calculate the profit a business makes if it sells 800 units at £8 each, with fixed costs of £2,000 and variable costs of £3 per unit. (2 marks) (2 marks)

Write the formula first, then the numbers, then the answer with its unit (£ or %). A correct method can earn a mark even if the final answer is wrong.

Key terms

The vocabulary this lesson expects you to use. Each one is linked from the first place it appears above.

Revenue
The money a business receives from sales. Price × quantity sold.
Fixed costs
Costs that do not change with the number of products made or sold, such as rent.
Variable costs
Costs that change directly with the number of products made or sold, such as raw materials.
Total costs
Fixed costs + total variable costs.
Profit
Total revenue minus total costs, when revenue is greater.
Loss
When total costs are greater than total revenue.
Interest
The cost of borrowing money, paid on top of the amount borrowed.

Questions and answers

9 questions set on this lesson, with the mark schemes and model answers open.

1. Exam question Define 1 mark Foundation

Define the term 'variable costs'.

Mark scheme — 1 mark available

  • Costs that vary with output / sales — 1 mark

Model answer

Costs that change directly with the number of products a business makes or sells.

2. Exam question Calculate 2 marks Foundation

A business makes 800 units a month. Its fixed costs are £2,000 a month and its variable costs are £3 per unit. Calculate its total costs. You are advised to show your working.

Mark scheme — 2 marks available

  • Correct method: fixed costs + (variable cost per unit × quantity) — 1 mark
  • Correct answer: £4,400 — 1 mark (award 2 marks for the correct answer with no working)

Model answer

Total costs = £2,000 + (£3 × 800) = £2,000 + £2,400 = £4,400

3. Exam question Calculate 2 marks Foundation

The same business sells all 800 units at £8 each. Using your answer above, calculate its profit. You are advised to show your working.

Mark scheme — 2 marks available

  • Correct method: (price × quantity) - total costs — 1 mark
  • Correct answer: £2,000 — 1 mark (award 2 marks for the correct answer with no working; own figure rule applies)

Model answer

Revenue = £8 × 800 = £6,400. Profit = £6,400 - £4,400 = £2,000

4. Exam question Calculate 2 marks Foundation

Jess borrows £10,000 to open a nail salon. She repays £11,500 in total. Calculate the rate of interest on the loan. You are advised to show your working.

Mark scheme — 2 marks available

  • Correct method: (total repayment - borrowed amount) ÷ borrowed amount × 100 — 1 mark
  • Correct answer: 15% — 1 mark (award 2 marks for the correct answer with no working)

Model answer

(£11,500 - £10,000) ÷ £10,000 × 100 = 15%

5. Exam question Explain 3 marks Foundation

Explain one impact on a business of an increase in its fixed costs.

Mark scheme — 3 marks available

  • An impact identified, e.g. lower profit / higher total costs / may need to raise prices — 1 mark
  • First linked point of explanation — 1 mark
  • Second linked point of explanation — 1 mark

Model answer

Its profit may fall (1). Fixed costs, such as rent, must be paid however many products the business sells, so its total costs rise (1). Unless the business can raise its prices or sell more, the gap between revenue and total costs shrinks, reducing profit (1).

6. Multiple choice 1 mark Foundation

Which one of the following is a fixed cost?

  1. A Raw materials
  2. B Rent Correct
  3. C Packaging
  4. D Ingredients

Why: Rent is paid whatever the business sells, so it is fixed. The others rise with every unit made.

7. Multiple choice 1 mark Core

A shop sells 200 T-shirts at £15 each. What is its revenue?

  1. A £215
  2. B £1,500
  3. C £3,000 Correct
  4. D £30,000

Why: Revenue = price × quantity = £15 × 200 = £3,000.

8. Multiple choice 1 mark Core

A business has revenue of £20,000 and total costs of £23,000. What is the result?

  1. A A loss of £3,000 Correct
  2. B A profit of £3,000
  3. C A profit of £43,000
  4. D It breaks even

Why: Total costs are greater than revenue, so it makes a loss of £3,000.

9. Multiple choice 1 mark Stretch

A business borrows £2,000 and repays £2,200. What is the interest rate?

  1. A 2%
  2. B 11%
  3. C 20%
  4. D 10% Correct

Why: (£2,200 - £2,000) ÷ £2,000 × 100 = 10%.