Sales, Revenue & Costs (Edexcel A Level Business) : Revision Note

Calculation of sales volume and sales revenue

• Sales volume is the number of units sold by a business

  • E.g. the number of Harry Styles album download purchases

• Sales Revenue is the value of the units sold by a business

  • E.g the revenue earned by Apple Music from sales of music downloads 

  • Sales revenue is a key business performance measure and must be calculated to identify profit

  • Sales revenue is calculated using the formula

• Sales revenue usually increases as the sales volume increases

• When a firm sells one product it is easy to calculate the sales revenue

  • The more products a firm sells, the harder it is to calculate the sales revenue

  • Computer systems make it easier to track sales revenue when multiple products are sold by the business

An introduction to costs

• In preparing goods/services for sale, businesses incur a range of costs. These costs can be broken into different categories

Fixed costs (FC)

• Costs that do not change as the level of output changes

  • These have to be paid whether the output is zero or 5000 

    • e.g. building rent, management salaries, insurance, bank loan repayments etc.

Variable costs (VC)

• Costs that vary directly with the output

  • These increase as output increases & vice versa

    • E.g. raw material costs, wages of workers directly involved in the production

Total costs (TC)

• The sum of fixed costs and total variable costs 

Calculation of fixed, variable and total costs

•  Based on the above definitions, we can calculate several different types of costs

Formulas to calculate different types of costs

Example: cost calculations where VC = $60

Variable costs per unit

• Variable costs per unit are calculated by adding together the cost of each component or raw material used to produce the unit

Diagrammatic representation of costs

Fixed costs

• The firm has to pay its fixed costs which do not change according to output

• The fixed costs for this firm are $4,000

Variable costs

• The variable costs initially rise proportionally with output, as shown in the diagram

• At some point, the firm will benefit from a purchasing economy of scale and the rise will no longer be proportional

Total costs

• The total cost is the sum of the variable & fixed costs

• The total costs cannot be 0 as all firms have some level of fixed costs

Average total costs

• As a firm grows, it can increase its scale of output generating efficiencies that lower its average total costs (AC) of production

• These efficiencies are called economies of scale 

• As a firm continues increasing its scale of output, it will reach a point where its average total costs (AC) will start to increase

• The reasons for the increase in the average costs are called diseconomies of scale

Contribution

• Contribution refers to a product’s selling price minus the variable costs directly involved in producing that unit
   

• Contribution can be calculated using the following formula:

• It is called contribution, as this amount contributes towards paying off the fixed costs of the business

  • Once the fixed costs have been paid off, then the contribution starts to contribute to the profits of the business

• Contribution is used to calculate the break even point