Extract 1 – Revenues costs and profits

Aaron Furniture Ltd

While watching the PowerPoint complete the Extract 1 worksheet

You will need a calculator to complete some of the sheet

Lesson Objectives

• To be able to discuss the Finance Director’s report made by Sunjit Patel of Aaron’s furniture

• To be able to calculate the costs revenues and profits per wardrobe

Starter

Read the section Extract 1 – Revenues costs and profits of the case study (page 2)

1. Sunjit Patel is the Finance Director2. Aaron furniture imports furniture from

Norway3. Aaron furniture made a profit last year

Financial year

• Phillip started his business in September

• So his financial year runs September to August each year

• In the financial year 2014-2015 Aaron Furniture made a loss

Why did Aaron furniture make a loss?The next few slides should help to answer this question

What’s wrong with the wardrobe?

• As a result of capacity limitations in the Bowton Factory some of the Egerton Wardrobes have to be made in Sweden

• It is more expensive to make this wardrobe in the UK Bowton factory than to import it

The Egerton Wardrobe

Capacity limitations?

• Capacity: the number of products that a business can produce (in a year)

Aaron furniture can only build a

certain amount of wardrobes a year

in its Bowton factory

Aaron furniture has this many orders - so to

fulfil the orders they have to

import the rest from Sweden

This data shows ALL the Egerton wardrobesWe will now use this data to calculate profit and loss on EACH wardrobe – see next slides

Fig 1

• Costs – the costs of making a wardrobe might include; paying for the wood, the handles, the varnish and the wages of the employee to make it. Money paid out of the business.

• Revenue – this is money paid by the customer for the wardrobe that the company receives into their bank account. You may like to think of it as money into a cash tin in a business.

• Profit – Total revenue minus total costs TR- TC = profit

Imported from Sweden

UK made in Bowton

Imported per wardrobe

UK made per wardrobe

Pieces sold

1000 600 --------- ---------

Revenue (R)

£500,000 500 500

Total costs (TC)Profit = R-TC

(-£12,000)

Now calculate the costs, revenues and profits per wardrobe for both the imported and the UK made

wardrobes

Imported from Sweden

UK made in Bowton

Imported per wardrobe

UK made per wardrobe

Pieces sold

1000 600 --------- ---------

Revenue (R)

£500,000 £300,000 £500 £500

Total costs (TC)

£450,000 £312,000 £450 £520

Profit = R-TC £50,000 (-£12,000) £50 (£-20)

Answer: what does this information tell us?

• Imported wardrobe:• Revenue £500 each• Cost to make each £450• Profit each £50

• UK made wardrobe• Revenue £500 each• Cost to make £520 each• Loss each £20

If the business continues to make these wardrobes in the UK it will make a loss

It more profitable for Aaron Furniture to import the wardrobes and sell them on

Fig 2

Use Fig 2 to complete this chart

2010-2011 2014-2015440

460

480

500

520

540

560

580

600

620

Chart to show The average price of Egerton range wardrobes in the 2010–2011 and in the 2014–2015 financial years (Fig.2)

Answer – your chart should look like this

2010-2011 2014-2015440

460

480

500

520

540

560

580

600

620

Chart to show The average price of Egerton range wardrobes in the 2010–2011 and in the 2014–2015 financial years (Fig.2)

The original price of the Egerton Wardrobe in 2010-2011 was:

The price has changed by this much:

Change / original =

Now calculate the percentage change in price over timeChange / original x 100

The original price of the Egerton Wardrobe in 2010-2011 was:

The price has changed by this much:

Change / original x 100 =

Now calculate the percentage change in price over timeChange / original x 100

600

100

100/600 x 100 = 16.66%

Answer

100 / 600 x 100 = 16.6% reduction in price

Since 2010 the average price of an Egerton Wardrobe has fallen by 16.6%

Sunjit’s conclusions in his report

Here is the case for closing down the Bowton factory:1. The Egerton wardrobe which is made in the

UK is not profitable2. Other items in the Egerton range made in the

UK are also not profitable3. The Ladybridge and Belmont ranges made in

the UK are also not profitable

Closed?

Is this the future of the Bowton factory – what do you think?

What might affect his decision?

Sunjit says: “The falling price of timber”

Why would this affect his decision to recommend closing the Bowton factory?

Answer

• If the price of raw materials (such as timber) falls this will lower the costs of the furniture made in the UK and could make it profitable again.

This would support the decision to keep the factory open

What else might affect his decision?

Sunjit says: “The strengthening of the pound against some other currencies.”

Why would this affect his decision to recommend closing the Bowton factory?

StrongPoundImportsCheaperExportsDearer

Answer

• A strong pound makes imports cheaper and exports dearer

This would support the decision to close the factory Closed

1. Did Aaron Furniture make a profit or a loss in 2014-2015?

2. Are the imports more expensive than the wardrobes made in the UK?

3. Will the falling prices of timber help keep the UK factory open?

4. Will a strong pound help keep the UK factory open?5. Is the data for the Ladybridge and Belmont ranges

similar or different to the Egerton data?

1. Loss2. UK wardrobes are more expensive3. Yes as it will lower the cost of making the

wardrobe in the UK4. No, it will mean the imports will be cheaper5. Similar - which is bad news as it shows that

all the imports are cheaper than those made in the UK