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

  • For example, the number of Harry Styles album download purchases

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

  • For example, 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:

$\mathrm{Sales}\mathrm{revenue}=\mathrm{Selling}\mathrm{price}\times \mathrm{Number}\mathrm{of}\mathrm{units}\mathrm{sold}$ 

• 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 down into different categories

Fixed costs

• Fixed costs (FC) do not change as the level of output changes

  • These have to be paid whether the output is zero or 5,000 

    • For example, building rent, management salaries, insurance and bank loan repayments

Variable costs

• Variable costs (VC) vary directly with the output

  • These increase as output increases and vice versa

    • For example, raw material costs and wages of workers directly involved in production

Total costs

• Total costs (TC) are the sum of FC and total VC

Average costs

• Average cost is the total cost of production divided by the number of units produced

Calculation of fixed, variable and total costs

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

Key formulas

Example: cost calculations where variable costs = £60

Variable costs per unit

• VC 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 FC for this firm are £4,000

Variable costs

• The VC initially rises proportionally with output, as shown in the diagram

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

Total costs

• The TC are the sum of the VC and FC

• The TC cannot be zero, as all firms have some level of FC

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 AC will start to increase

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

Contribution

• Contribution is a product’s selling price minus the VC directly involved in producing that unit
   

• Contribution can be calculated using the following formula:

$\mathrm{Contribution}=\mathrm{Selling}\mathrm{price}\mathrm{per}\mathrm{unit}-\mathrm{Variable}\mathrm{cost}\mathrm{per}\mathrm{unit}$

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

  • Once the FC have been paid off, the contribution starts to contribute to the profits of the business

• Contribution is used to calculate the break-even point