Costs and revenues

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

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

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

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

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

Output or sales.

Fixed cost.

Output or sales.

Rent for business premises.

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

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

Raw materials used to make the product.

$15 per unit.

Variable cost.

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

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

They fall to zero because no units are being produced.

Total costs = Fixed costs + Variable costs.

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

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

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

A fixed part and a variable part.

Semi-variable cost.

They usually stay the same.

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

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

Units produced.

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

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

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

Total revenue = price × quantity sold.

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

Quantity sold.

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

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

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

Revenue = 200 × 3.50 = $700.

Revenue can also be called turnover or sales revenue.

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

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

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

Revenue = 150 × 4.00 = $600.

Revenue = price per unit × quantity sold.

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

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

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.

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.

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

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

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

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.

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

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

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

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

Gross profit = Sales revenue − Cost of goods sold.

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

Profit = Revenue − Costs.

Net profit = Gross profit − Expenses (overheads).

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.

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

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

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 = $100,000 − $60,000 = $40,000.

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.

Profit = $80,000 − $65,000 = $15,000.

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

It shows overall business performance after all costs are deducted.

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

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

Depreciation.

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

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.

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

Revenue per unit falls, but demand may rise.

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

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.

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

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

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

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

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.