4.2 Revenue and Costs

Sales revenue definition:

The income a business receives from selling its products and services.

Sales revenue formula:

Selling Price x Quantity

Costs definition:

The expenditure necessary to set up and run a business.

Costs types:

• Fixed costs

• Variable costs

Fixed costs definition:

Those costs which do not alter when a business changes its output.

Fixed costs examples:

• Rent

• Business rates

• Salaries

• Advertising

• Insurance

• Legal fees

Variable costs definition:

Those costs that vary directly in relation to changes in the level of business output.

Variable costs examples:

• Raw materials

• Wages

• Bought-in stock

• Packaging

Total costs formula:

Fixed costs + Variable costs

Profit definition:

The amount by which a business's revenue from all its sales exceed its costs.

Profit formula:

Sales revenue - Total costs

Breakeven definition:

The point at which the business is making neither a profit or a loss.

Breakeven formula:

Total revenue = Total cost

Breakeven point formula:

Fixed Costs / Contribution per unit

Contribution per unit formula:

Selling price (per unit) - Variable cost (per unit)

Average Rate of Return defintion:

It calculates the average annual % return an investment provides for a business.

Average Rate of Return (ARR)

Average annual profit / Initial cost of investment x100