Costs and revenues

Average cost per unit = Total costs ÷ Number of units produced.

Fixed costs are costs that do not change with the level of output or sales in the short run.

Output or sales.

If the cost is still paid when output is zero, it is fixed; if it falls to zero, it is variable.

Total costs (TC) = Fixed costs (FC) + Variable costs (VC).

Variable costs are costs that change in direct proportion to the level of output or sales.

Semi-variable costs have both a fixed component and a variable component.

Because fixed costs are spread over more units, reducing cost per unit.

Output or sales.

Raw materials used to make the product.

Fixed cost.

Rent for business premises.

Total costs = Fixed costs + Variable costs.

They fall to zero because no units are being produced.

An electricity bill with a standing charge plus charges per unit used.

$15 per unit.

Variable cost.

Because they must be paid even if the business produces or sells nothing.

Fixed costs are being spread across more units (or economies of scale).

Semi-variable, because it has a fixed part (salary) and a variable part (commission).

They usually stay the same.

Semi-variable cost.

A fixed part and a variable part.

It increases when more sales are made and decreases when sales fall.

Units produced.

VC = 2,000 × $5 = $10,000. TC = $10,000 + $10,000 = $20,000.

It helps a business judge whether its selling price covers costs and what margin might be earned per unit.

Piece-rate wages where workers are paid per unit produced.

Fixed costs are spread across more units, reducing the fixed cost per unit.

It is roughly constant per unit (each extra unit adds a similar extra cost).

If that income source falls (e.g. demand drops), the business may lose most of its income and struggle to survive.

Quantity sold.

Total revenue = price × quantity sold.

Revenue is the total income a business earns from selling its goods or services.

A revenue stream is a distinct source of income for a business.

Revenue can also be called turnover or sales revenue.

Customers pay a recurring fee for continued access, such as Netflix or Spotify subscriptions.

Revenue = 200 × 3.50 = $700.

They confuse revenue with profit, even though revenue is before costs are deducted.

If one stream declines, other streams can compensate, making overall income more stable.

Profit is the amount remaining after all costs are deducted from revenue.

Subscriptions provide predictable recurring income, which stabilises cash flow and improves planning.

A business earns a percentage of each transaction, such as an estate agent taking commission on house sales.

Revenue = 150 × 4.00 = $600.

Revenue = price per unit × quantity sold.

A business earns income by allowing others to use its brand, product, or intellectual property in return for a fee.

Revenue = 500 × 20 = $10,000.

Diverse income sources can make the business appear lower risk and more resilient, which investors prefer.

Coffee revenue = $700 and cake revenue = $600, so total revenue = $1,300.

They reduce risk and can stabilise cash flow by providing more than one source of income.

It shows Apple has multiple revenue streams, earning income in different ways rather than relying on one source.

Because method marks can be awarded even if the final answer is incorrect, as long as the correct process is shown.

Revenue streams are like legs on a stool: the more legs (income sources), the more stable the business is if one leg weakens.

Revenue is the total money coming in before costs are deducted, while profit is what remains after costs are subtracted.

State the formula and show the calculation steps clearly before the final answer.

Gross profit = Revenue − Cost of goods sold (COGS).

Profit is the financial surplus remaining after all costs are deducted from revenue.

Gross profit is sales revenue minus cost of goods sold (COGS).

Net profit is gross profit minus operating expenses.

Profit is revenue minus costs over a period. Cash is the actual money available in the bank at a point in time.

Net profit = Gross profit − Expenses (overheads).

Rent, wages, utilities, marketing, insurance, depreciation.

Gross profit = Sales revenue − Cost of goods sold.

Profit = Revenue − Costs.

Customers may not have paid yet (credit sales), so profit is recorded but cash has not been received.

Net profit = $40,000 − $25,000 = $15,000.

Direct costs such as raw materials, direct labour and purchase cost of stock.

Because the profit includes credit sales that are not yet cash, so it may not have enough liquid funds to pay suppliers on time.

Gross profit, because it focuses on revenue and direct costs of goods sold.

Profit provides a reward for risk-taking, funds future growth, and ensures long-term survival.

Yes. For example, it may have received a bank loan or sold an asset, creating cash inflow even if operating profit is low or negative.

Net profit, because it deducts operating expenses from gross profit.

Gross profit = $100,000 − $60,000 = $40,000.

It shows overall business performance after all costs are deducted.

Profit = $80,000 − $65,000 = $15,000.

Because operating expenses are too high and reduce the final profit.

Because it may not have enough cash to pay short-term debts, even if it makes profit on paper.

It shows how efficiently the business is trading — buying and selling products.

Depreciation.

Confusing revenue with profit, or confusing profit with cash flow.

Profit decreases because total costs rise while revenue is unchanged.

Revenue per unit rises, but demand may fall.

Break-even output = Fixed costs ÷ (Price − Variable cost per unit).

Rising costs reduce profit margins and may force the business to raise prices, cut costs, or accept lower profit.

It could raise prices, cut costs elsewhere, or find cheaper suppliers to protect profit margins.

Because higher prices may reduce demand, leading to lower sales revenue and loss of market share.

Revenue per unit falls, but demand may rise.

Break-even output increases because contribution per unit falls.

Break-even output decreases because profit per unit (contribution) increases.

It depends on how much demand falls. If demand falls slightly, total revenue may rise; if it falls a lot, total revenue may drop.

Break-even output decreases because contribution per unit increases.

Profit margins shrink, and the business may make a loss if costs rise enough.

Profit increases because the business keeps more of its revenue after paying costs.

Price elasticity of demand.

Recalculate step by step using the updated price or costs, showing working to earn method marks.

Contribution per unit = $25 − $15 = $10. Break-even output = $30,000 ÷ $10 = 3,000 units.

Price and variable cost changes affect contribution per unit, which shifts the break-even output.

Because both affect contribution per unit (Price − Variable cost), which changes how quickly fixed costs are covered.

Essential goods such as basic food items, medicine, or utilities tend to have inelastic demand.

Lower costs can allow a business to reduce prices or invest more in marketing/quality while still maintaining profit.