Revenue, Costs and Profit

Revenue is the total money a business receives from selling its products or services. It is sometimes called sales revenue or turnover.

Formula: Revenue = Price × Quantity Sold

Revenue does not mean profit. A business can have high revenue but still make a loss if its costs are too high.

Worked example:

A bakery sells 500 loaves of bread per month at a price of £2.50 each.

$\text{Revenue}=\pounds 2.50\times 500=\pounds 1,250$

If the bakery also sells 200 pastries at £1.80 each:

$\text{Pastry revenue}=\pounds 1.80\times 200=\pounds 360$

$\text{Total revenue}=\pounds 1,250+\pounds 360=\pounds 1,610$

Factors that affect revenue:

• Changing the price — a higher price raises revenue per unit but may reduce quantity sold
• Changing the quantity sold — effective marketing, wider distribution, or promotions can increase sales volume
• Product range — selling more different products adds revenue streams

Exam tip: Always substitute numbers into the formula and show your working. Write the unit (£) in your answer or you risk losing marks on a "show your working" question.

Businesses separate costs into two types depending on whether they change with output.

Fixed costs stay the same regardless of how many units are produced or sold. They must be paid even if output is zero.

Variable costs change in direct proportion to the number of units produced or sold.

Cost Type	Definition	Examples
Fixed costs	Do not change with output level	Rent, insurance, manager salaries, loan payments
Variable costs	Change in direct proportion to output	Raw materials, packaging, piece-rate wages

Why the distinction matters:

If a business produces more units, its variable costs rise but its fixed costs stay constant. This means the fixed cost per unit falls as output rises — spreading the fixed costs over more units. This is one reason larger businesses can often operate more cheaply per unit than smaller ones.

Worked example — identifying cost type:

A T-shirt printing business pays £1,200/month in rent, employs a full-time manager at £2,000/month, buys blank T-shirts for £4 each, and spends £1.50 per T-shirt on ink and printing supplies.

• Rent £1,200: fixed (same whether 0 or 1,000 T-shirts are made)
• Manager salary £2,000: fixed
• Blank T-shirts £4 each: variable
• Ink/supplies £1.50 each: variable

Fixed costs = £3,200/month. Variable cost per T-shirt = £5.50.

Once fixed and variable costs are identified, total costs can be calculated.

Formula: Total Costs = Fixed Costs + Variable Costs

Because variable costs depend on output quantity:

$\text{Variable Costs}=\text{Variable Cost per Unit}\times \text{Quantity}$

$\text{Total Costs}=\text{Fixed Costs}+(\text{Variable Cost per Unit}\times \text{Quantity})$

Worked example — bakery continued:

The bakery from the earlier example produces 500 loaves per month.

• Fixed costs: rent £300, insurance £50, manager salary £50 = £400/month
• Variable cost per loaf: flour, yeast, packaging = £0.80 per loaf

$\text{Variable costs}=\pounds 0.80\times 500=\pounds 400$

$\text{Total costs}=\pounds 400+\pounds 400=\pounds 800$

What happens if output changes?

If the bakery produces 800 loaves instead:

$\text{Variable costs}=\pounds 0.80\times 800=\pounds 640$

$\text{Total costs}=\pounds 400+\pounds 640=\pounds 1,040$

Fixed costs remain at £400 — only the variable element changes.

Exam tip: A common error is to treat all costs as variable. Always identify which costs are fixed first, then calculate variable costs separately.

Profit is what remains after all costs are subtracted from revenue. If costs exceed revenue, the business makes a loss.

Formula: Profit (or Loss) = Revenue − Total Costs

A positive result is a profit; a negative result is a loss.

Worked example — bakery profit calculation:

Using the figures established above:

• Revenue = £1,250
• Total costs = £800

$\text{Profit}=\pounds 1,250-\pounds 800=\pounds 450$

The bakery makes a profit of £450 per month.

Worked example — loss scenario:

A new café has monthly fixed costs of £3,500, variable costs of £2.00 per cup of coffee, and sells 800 coffees at £3.50 each.

$\text{Revenue}=\pounds 3.50\times 800=\pounds 2,800$

$\text{Variable costs}=\pounds 2.00\times 800=\pounds 1,600$

$\text{Total costs}=\pounds 3,500+\pounds 1,600=\pounds 5,100$

$\text{Profit/Loss}=\pounds 2,800-\pounds 5,100=-\pounds 2,300$

The café makes a loss of £2,300. It needs either higher revenue (more customers, higher prices) or lower costs to become profitable.

A profit and loss account (also called an income statement) summarises a business's revenue and costs over a period, showing whether it made a profit or loss. The Edexcel specification requires understanding of the basic structure.

Line Item	£
Revenue (Sales)	1,250
Less: Variable Costs	(400)
Gross Profit	850
Less: Fixed Costs	(400)
Net Profit (Loss)	450

Gross profit = Revenue − Variable Costs (or Cost of Sales). It shows whether the core trading activity is profitable before overheads.

Net profit = Gross Profit − Fixed Costs (Overheads). This is the "bottom line" — what the business actually keeps.

A business can have a positive gross profit but a net loss if its fixed overheads are very high. This tells managers that the trading activity works but the cost base needs cutting.

Exam tip: In a 4-mark or 6-mark question, distinguish gross from net profit. Showing you understand the difference demonstrates higher-level knowledge.

When a business borrows money through a loan, it must pay back the original sum (the principal) plus interest — the charge made by the lender for providing the funds.

Interest is a fixed or variable cost depending on the loan type:

• Fixed-rate loans — the interest payment is the same every month (a fixed cost)
• Variable-rate loans — the interest payment changes if the Bank of England base rate changes (note: this makes the cost unpredictable over time, but it is still an overhead — it does not vary with how many units the business produces)

Why interest matters to businesses:

• It increases the total amount repaid on any loan
• It reduces profit — interest payments appear as a cost in the profit and loss account
• High interest rates make borrowing expensive, which may deter businesses from taking loans for expansion

Example — effect of interest on a loan:

A business borrows £10,000 at a simple annual interest rate of 5% for 2 years.

Annual interest = 5% of £10,000 = £500 per year

Total interest over 2 years = £1,000

Total repaid = £10,000 + £1,000 = £11,000

The £500 annual interest is a cost that reduces the business's profit each year.

Exam tip: The specification does not require compound interest calculations. You need to understand that interest is the cost of borrowing and that it reduces profit. Show you can apply a percentage to a loan value to find an annual interest payment.

Calculation checklist:

1. Always show the formula first

Write "Revenue = Price × Quantity" before substituting numbers. Examiners award method marks even if arithmetic goes wrong.

2. Include units in every answer

"£450" not "450". Missing the £ sign is one of the most common ways students lose easy marks.

3. Don't confuse revenue with profit

Revenue is what a business receives. Profit is what it keeps after costs. A business turning over £500,000 may be making a loss.

4. Fixed costs don't change with output

If a question increases output and asks you to recalculate total costs, only the variable element changes. Students frequently recalculate the rent or manager's salary — don't.

5. Loss vs negative profit

A loss of £2,300 should be written as "a loss of £2,300" or "−£2,300", not "£2,300 profit". Be precise about sign.

Common Error	Correct Approach
Treating rent as a variable cost	Rent stays the same at any level of output — it is fixed
Calculating profit as Revenue − Variable Costs only	Total costs = Fixed + Variable; subtract both from revenue
Forgetting to multiply variable cost per unit by quantity	Variable costs = Variable Cost per Unit × Quantity
Writing profit when the business makes a loss	If Revenue < Total Costs, the result is a loss — write it as such