TOPIC A.2 UNDERSTAND HOW BUSINESSES MAKE A PROFIT Sir went to Iceland! • On the way to school this morning I called into Iceland • I bought 10 boxes of Strawberry and Vanilla ice cream cones and 10 boxes of Choc and Nut ice cream cones • Each box cost £1 and has 6 cones in it • How many ice creams do I have? • How much money did I spend? • At break time today I sold the cones at 75p each • I was so successful I sold out all my stock • How much money did I make from my sales? • How much profit did I make? • Should I do the same again every day this term?
Transcript
TOPIC A.2 UNDERSTAND HOW BUSINESSES MAKE A PROFIT
Sir went to Iceland!• On the way to school this morning I called into Iceland • I bought 10 boxes of Strawberry and Vanilla ice cream cones
and 10 boxes of Choc and Nut ice cream cones• Each box cost £1 and has 6 cones in it• How many ice creams do I have?• How much money did I spend?• At break time today I sold the cones at 75p each• I was so successful I sold out all my stock• How much money did I make from my sales?• How much profit did I make?
• Should I do the same again every day this term?
TOPIC A.2 UNDERSTAND HOW BUSINESSES MAKE A PROFIT COSTS, REVENUES AND PROFIT
By the end of this topic you will be able to: Understand and identify how businesses make
money Identify sources of revenue for a business Calculate revenue Describe how businesses have to spend money Identify and understand types of expenditure Understand the importance of knowing revenue
and expenditure Define profit and loss Calculate profit
REVENUES
Costs are just one side of the equation - they look at the money going out of the business
Revenues are the other side - they look at the money coming into the business
Businesses generate revenue by selling goods and services
SOURCES OF REVENUE FOR A BUSINESS
Some businesses will have just 1 source of revenue e.g. a taxi company provides taxi rides and receives a fare from the customer
Others will have several sources e.g. a night club may charge an entrance fee, sell drinks, hire the venue for private parties mid week
Benjamin takes his girlfriend to see a show in the West End. The tickets cost him £35 each and he is to pay for them when
he picks them up at the box office. He has £100 with him when he walks into the theatre and only £2 when he walks
out. How can this be?
SOURCES OF REVENUE FOR A BUSINESS In pairs think of a leisure facility near where
you live e.g. a bowling alley, swimming pool, cinema
Draw a spider diagram to identify all the possible sources of revenue for your chosen venue
QUESTION TIME 1 MARK
Which one of these is a source of revenue for a newsagent? Advertising special offers
Sweet sales
Paying delivery boys and girls
Stocking magazines
Can you justify your answer?
REVENUES
Revenue = Number of items sold x the selling price per item
If I sell 100 ice creams at 60p my sales revenue is £_ _
SALES REVENUE
In the examination you will need to know the formula for sales revenue
Sales revenue = number of sales x price per unit
CALCULATING REVENUE The amount of money being received from sales. If selling
price per meal and drink is £15 then if there are 0 sales the revenue will be _ , if 500 customers then revenue will be £7500
The sales revenue of a restaurant would include starters, main courses, deserts, drinks.* we have assumed here a set menu price of £15
Can you fill in the missing sales revenues in the table below
Customers 0 500 1000 1500
Revenue 7500
Revenue = 500 sales x £15 =
£7500
30 SECOND TEST End
What is the formula for sales revenue?
QUESTION TIME 2 MARKS
A small business bakes and sells luxury cupcakes. Each cup cakes sells for £1.50
The business sold 100 000 cupcakes last year
Calculate the total revenue for the business
£
EXPENDITURE Expenditure is anything a business pays out
Businesses have to spend money in order to succeed
What would happen if: A business has a fantastic new product but nobody
knows about it? A clothes shop has run out of stock of the most popular
brand of jeans? A restaurant opens its doors for business but staff have
not turned up because they weren’t paid last week? An inventor has designed a revolutionary new app but
can’t afford to launch it?
EXPENDITURE
A business will have different types of expenditure: Marketing Stock Staff development Heat and light Rent Repaying loans Salaries Product development
Explain how each of these will contribute
towards the success of a business of your choice.
EXPENDITURE
Expenditure is anything a business pays out
If these relate to everyday running costs then they are called overheads e.g. electricity, rent, wages
It is important for a business to know how much money is coming in and going out – WHY?
BusinessMoney coming in is called?
Money going out is called?
PROFIT Having considered both sides of the equation – costs and
revenues we can now consider the relationship between them. Total Revenue (TR) – money coming in from sale of goods and
services Total Costs (TC) – money going out to provide for and generate those
sales The relationship between costs and revenue will determine if the
business makes a profit or a loss.
TR£1000 TC
£800 Profit £200
TR £1200
TC£1300
Loss£100
There is a surplus (a profit) of £200
There is a shortage (a loss) of £100
REVENUE AND EXPENDITURE
Can you complete these sentences
If total revenue is ______ than expenditure the business has made a PROFIT
If total revenue is _____ than expenditure the business has made a ______
PROFIT
In the examination you will need to know the formula for profit
Profit = revenue - expenditure
3 FORMULAE
So far you have learnt 3 formulae - can you remember them?
Pens at the ready
30 SECOND TEST End
What is the formula for total costs?
30 SECOND TEST End
What is the formula for sales revenue?
30 SECOND TEST End
What is the formula for profit?
CALCULATING PROFIT Restaurant example
Fixed Cost £12000 Variable Cost £5 per customer Selling price £15 per customer
Can you calculate the profit or loss for each number of customers?
Customers 0 500 1000 1500
Fixed Costs 12000 12000 12000 12000
Variable Costs 0 2500 5000 7500
Total Costs 12000 14500 17000 19500
Total Revenue 0 7500 15000 22500
Profit / Loss
FINANCIAL TERMS
Price The amount of money paid by a consumer for a
good or service Sales
The number of items sold or services provided Revenue
The value of money coming in from sales (quantity sold x selling price)
Sometimes also referred to as sales revenue or sales turnover
Costs The expenses incurred by a business when
providing goods or services Profit
The surplus of revenue over expenses Calculated by deducting expenses from
revenue
FINANCIAL CALCULATIONS - PRACTISE Revenue
Number of products sold x selling price 1000 cups of coffee at £0.80 = £_ _ _
Costs Add up all the costs incurred in making the
sales Take care - some costs may be per item
sold; others may be per week, month or year
£0.15 per cup of coffee, Wages £50, Equipment £25
Total variable costs = Total fixed costs = Total costs =
FINANCIAL CALCULATIONS - PRACTISE
Profit or loss The difference between revenue and costs Revenue – costs = Profit (or loss) 1000 cups of coffee revenue = £ 1000 cups of coffee costs = £ 1000 Cups of coffee profit = £
What would be the outcome if each cup of coffee was sold at just £0.30 and wages were £100 and
equipment £60?
FINANCIAL CALCULATIONS - PRACTISE Terry sells luxury bathrobes to boutique
retailers across the UK. Each robe sells to retailers at £75 and costs
£35 in towelling and other raw materials used to make the product.
He sells 600 robes per month His monthly costs are:
Distribution £2000 Wages £4500 Marketing £1000 Equipment £2500
Calculate Terry’s profit or loss. You must show all your workings.
RELATIONSHIP BETWEEN PRICES, COSTS, REVENUES AND PROFITS
What were the costs incurred by the Seaweed Soap team?
What happens when costs get out of control? How could the team respond to this error? What is the relationship between costs and
price? How might this impact on sales? How might this impact on profit?
Are YOU better than these candidates on “The Apprentice”?
Kristen runs a small business making balloon decorations for weddings, birthdays and corporate events. She sells an average of 100 displays per month at a price of £90. Each balloon display costs £20 to make. She delivers them to venues costing her £1000 per month, pays an assistant a wage of £900 per month and advertises in a local paper for £150 per month. As a sole trader Kristen does not pay herself any money but is hoping to be able
to take money out of the business if it makes a profit.Question time1. What is meant by the term ‘profit’? (2
marks)2. Calculate Kristen’s revenue for one month. (2
marks)3. Calculate Kristen’s costs for one month.
(3 marks)4. Calculate Kristen’s profit or loss for one month.
You have now completed this topic, are you able to? Understand and identify how businesses make
money Identify sources of revenue for a business Calculate revenue Describe how businesses have to spend money Identify and understand types of expenditure Understand the importance of knowing revenue
and expenditure Define profit and loss Calculate profit
