Key Idea: Profit is what is left when the costs are taken away from the money coming in. This topic is the kinds of cost, where revenue comes from, and how a change in either moves the profit.
Costs
- Fixed: the same whatever the output, such as rent and salaries.
- Variable: rise with output, such as flour at about $0.90 a loaf.
- Direct costs belong to one product; indirect costs (overheads) are shared.
Revenue
- Total revenue = price × quantity sold.
- Revenue streams: the different sources of income.
- At Lena's: bread, cakes, lunches and wholesale make $1,600,000.
Profit
- Profit = total revenue − total cost.
- Lena's 2025: $1,600,000 − $1,515,000 = $85,000 before interest and tax.
- A price or cost change moves profit: work out both sides.
The words to know
| Word | Means | Do not confuse with |
|---|---|---|
| Fixed cost | a cost that does not change with the level of output | a cost that never changes: rent can still rise next year |
| Variable cost | a cost that changes directly with the level of output | a cost that goes up and down at random |
| Direct cost | a cost that can be traced to one product | a variable cost: a machine for one product is direct and fixed |
| Indirect cost (overhead) | a cost shared by the whole business, not one product | a small cost |
| Total cost | fixed costs + variable costs | the cost of one unit |
| Total revenue | price × quantity sold | profit, which is after costs |
| Revenue stream | a source of revenue, such as sales, fees, subscriptions or rent | a source of finance, which is money raised, not earned |
For a calculation, write the formula, put in the numbers from the case, and give the answer with its unit. Show every step. For a comment, say which way the figure moved, by how much, and the reason in the case.
Exam-style question
For 2025 Lena's Bakery Ltd had sales revenue of $1,600,000, cost of sales of $480,000, expenses of $1,035,000, interest of $10,000 and tax of $15,000. It also had cash of $25,000 and debtors of $40,000. Calculate the bakery's profit for the period (show all your working).
Model answer plan
See the mark-by-mark plan — for / against / judgement, with marking guidance — in study mode.
Important: Cash, debtors, stock and loans are on the balance sheet. They are not revenue and not costs, so they never go into a profit sum. Read the table and cross out what the business owns or owes before you start.
Tap each card to check yourself.
Fixed or variable: the rent on the High Street shop? Fixed. It is the same whether the shop sells 100 loaves or 500.
Direct or indirect: the accountant's fee? Indirect. It is shared by the whole business, not one product.
A shop sells 420 loaves at $3. Total revenue? 420 × $3 = $1,260.
Fixed costs $20,000, variable costs $9,000. Total cost? $20,000 + $9,000 = $29,000.
Name two revenue streams a bakery could add. Any two: baking classes, renting out the ovens, a bread subscription, wholesale to cafés.
Flour costs rise 10%. What happens to profit if prices stay the same? Variable costs rise, so total cost rises and profit falls: at Lena's by $48,000.
Exam tips
- Fixed costs do not change with output; variable costs do. Give an example from the case.
- Total revenue = price × quantity; total cost = fixed + variable; profit = revenue − total cost.
- Show the working for every calculation, with the $ on the answer.
- Never put cash, debtors, stock or loans into a profit sum.
- Comment on a figure: direction, size, and the reason in the case.