Revenue, cost and profit

Question 1

What is revenue?

Answer 1

Revenue is the income earned by a business over a period of time, eg one month. The amount of revenue earned depends on two things - the number of items sold and their selling price. In short, revenue = price x quantity.
Revenue is sometimes called sales, sales revenue, total revenue or turnover.

Question 2

What are costs?

Answer 2

Costs are the expenses involved in making a product. Firms incur costs by trading.

Question 3

What are two types of costs?

Answer 3

Some costs, called variable costs, change with the amount produced. For example, the cost of raw materials rises as more output is made.
Other costs, called fixed costs, stay the same even if more is produced. Office rent is an example of a fixed cost which remains the same each month even if output rises.

Question 4

How can you classify costs?

Answer 4

Another way of classifying costs is to distinguish between direct costs and indirect costs. Direct costs, such as raw materials, can be linked to a product whereas indirect costs, such as rent, cannot be linked directly to a product.

Question 5

What is the total cost?

Answer 5

The total cost is 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).

Question 6

What is profit?

Answer 6

Profit is the surplus left from revenue after paying all costs. Profit is found by deducting total costs from revenue. In short: profit = total revenue - total costs. Profit is the reward for risk-taking.

Question 7

How can a business use profit?

Answer 7

reward owners
invest in growth
save for the future, in case there is a downturn in revenue

Question 8

Whats a loss?

Answer 8

Trading does not guarantee profit. A loss is made when the revenue from sales is not enough to cover all the costs of production. For example, if a company has a total revenue of £60,000 and a total cost of £90,000, then they have lost £30,000 from trading.

Question 9

How can losses be reduced/turned into profits?

Answer 9

cutting costs - eg by letting staff go and asking those who remain to accept lower wages
increasing revenue - eg by cutting prices and selling more items - if demand is elastic
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