1.3.2 business revenues, costs and profits€¦ · remember, fixed costs are those costs that stay...
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PuttingaBusinessIdeaintoPractice1.3.2Businessrevenues,costsandprofit
Keyelementstothistopic
CostsRevenue Profits
ConceptandCalculation
Whatisrevenue?
Revenueistheincomegainedbyabusinessfromsellinggoodsandservices.Itisa
formofcashinflow.
Howisrevenuegenerated?
Bothnewandestablished businesseswillgeneraterevenuefromtrading,e.g.,sellinggoodsandservices.
Cashinflowsfromnon-tradingsourcesarenotclassedasrevenue,e.g.,loansreceived,saleofassets,ownerscapitalinjectedintothebusiness.
RevenueFormula
Revenue=PricexQuantity
Whatdoesrevenuelooklike?
Totalrevenuerisesindirectproportiontothequantitysold.
At0unitsofsale,totalrevenueis£0.At10unitsofsale,revenueis£40.
Whatisthesellingprice?
TheStart-UpofMuddyBootsFoodCompany
RolandandMirandaBallardgrewtiredofcorporatelifeanddecidedtosetupanewbusiness,makingandsellinghighqualityburgers
1. CalculateMuddyBootsrevenue forMarch.
2. WhatotherinformationdoyouneedtoknowinordertodecidewhetherornottheMuddyBootsbusiness isprofitable?
Example:
MirandaanticipatesthaninMarchtheywillsell400burgerpacks,charging£3.00perpack.
TimetoCalculate
CalculatingRevenue
MarchQuantity sold(units)(Q)Selling priceperunit(SP)REVENUE (QxSP)
400£3
£1200
Whatwouldhappenif?
Miranda’smeatsupplierhasincreasedthepriceofthebeefmincetheyuse.Mirandadecidestoincreasethepriceofherburgerpacksto£3.50.RecalculatetherevenueforMarch
MarchQuantity sold(units)(Q)Selling priceperunit(SP)REVENUE (QxSP)
400£3.50£1400
Extensioncalculation– Calculatethepercentageincreaseinrevenueasaresultoftheincreaseinprice
WhatareCosts?
Thespendingthatoccurstosetupandruna
business
FixedCosts VariableCostsCostswhichchangeasaresultofchangesin
output
Costswhichdonotchangeinrelationto
output
Identify2examplesoffixedcosts
Identify2examplesofvariablecosts
BusinessCosts
FixedCosts VariableCostsExamples:
RawmaterialsOtherboughtinsuppliesWageslinkedtooutput
Examples:Rent&ratesforpremisesWagesandsalariesnot
linkedtooutputMarketingcosts
InsuranceProductdevelopment
costs
BusinessCosts
MuddyBootsCosts
Remember, fixed costs are those costs that stay the same no matter how many burgers the business makes and sells.
Muddy Boots variable costs are spent on items that will need a greater quantity as the number of burgers increases. So as the output increases the amount spend on variable costs increases
Yourchallengeistoidentifytheirfixedandvariablecostsonthenextslide
IdentifytheFixed(F)andVariableCosts(C)
TaketheTrapDoorChallenge
presentsStayawayfromthe
pressspacebartobegin
Somewheredeepintheforestyouhavefoundalogcabin.
Insidethecabinisasetoftrapdoors.Someofthetrapdoorsarefine.However,othersleadtoa
deepdarkdungeon!Stayawayfromthetrapdoor!
WebsitedesignLegal&accountingfees
PieceratepayforpackagingstaffMeat
Roland&Miranda’ssalary
Standfeesatmarkets
Costofbuildingcommercialkitchen
Onions
AdvertisingDevelopment&trademarkingofbrand/logo
Insuranceforproperty/equipm
entVanfordeliveries
WasteproductsattestingstageHerbsPublicliability
insurancePackaging
WhichoftheseisaFIXEDCOSTtoMuddyBootsBurgers?
TotalCostsFormula
TOTALCOSTS=Totalfixedcosts+Totalvariablecosts
TimetoCalculate
Packaging £0.15 perpack
Insurance £50
Advertising £30
Onions £0.10perpack
Meat £0.80 perpack
Herbs £0.05 perpack
MarketStandfees £150
Salary £700
Pieceratepayforpackagingstaff
£1.50perpack
Legal andaccountingfees £50
Miranda identified the following costs for March. She anticipates 400 packs will be sold
Calculate:
1. TotalFixedCosts
2. TotalVariableCosts
3. TotalCosts
TimetoCalculate
Insurance £125Advertising £30Salary £700Legal andaccountingfees £50MarketStandFeesTotal FixedCosts
TotalFixedCosts
£200£1,105
Calculatethevariablecostsperpack
CostPackaging £0.15 perpackOnions £0.10perpackMeat £0.50 perpackHerbs £0.02 perpackPieceratepayforpackaging staff £1.50perpackVariable costperpack £2.27
TotalMuddyBootCosts
MarchVariable costsperunit(VC) £2.27TOTAL VARIABLE COSTS(QxVC) £908FIXED COSTS £1105TOTALCOSTS(FC+VC) £2103
WhatisProfit?
Thedifferencebetweentotalrevenueandtotal
costsTherewardforriskstaken
byentrepreneurs
ProfitFormula
Profit=TotalSales– TotalCosts
Revenue,CostsandProfit
Revenue Total costs Profitorloss?£100,000 £75,000 £25,000=PROFIT£100,000 £100,000 £0=BREAKEVEN£100,000 £125,000 (£25,000)=LOSSIfrevenueisgreaterthantotalcosts=PROFITIf revenueis lessthantotalcosts=LOSSIf revenueisequaltototalcosts=BREAKEVEN
Note:negativefiguresareshowninbrackets
AProfitableMarchforMuddyBoots?
DidMuddyBootsmakeaprofitinMarchusingthenew£3.50price?
Calculatethetotalprofit/loss
Profit/Loss(revenuelesstotalcosts)
£1400(revenue)– 2103(totalcosts)
Profit/Loss=(£703)
SuggestthreewaysMirandacouldimprove
theprofitabilityofMuddyBoots