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  1. 1-1-the-nature-and-purpose-of-business
    3 主题
  2. 1-2-forms-of-business
    5 主题
  3. 1-3-the-external-environment
    5 主题
  4. 2-1-management-and-leadership
    3 主题
  5. 2-2-management-decision-making
    4 主题
  6. 2-3-the-role-and-importance-of-stakeholders
    3 主题
  7. 3-1-marketing-objectives
    1 主题
  8. 3-2-understanding-markets-and-customers
    5 主题
  9. 3-3-making-marketing-decisions
    2 主题
  10. 3-4-the-marketing-mix
    7 主题
  11. 4-1-operational-objectives
    2 主题
  12. 4-2-operational-performance
    1 主题
  13. 4-3-efficiency-and-productivity
    3 主题
  14. 4-4-quality
    1 主题
  15. 4-5-inventory-and-supply-chain-management
    3 主题
  16. 5-1-financial-objectives
    2 主题
  17. 5-2-financial-performance
    6 主题
  18. 5-3-sources-of-finance
    3 主题
  19. 5-4-cash-flow-and-profit
    1 主题
  20. 6-1-human-resource-objectives
    1 主题
  21. 6-2-human-resource-performance
    1 主题
  22. 6-3-organisational-design
    3 主题
  23. 6-4-human-resource-planning
    4 主题
  24. 6-5-motivation
    4 主题
  25. 6-6-improving-employer-employee-relations
    2 主题
  26. 7-1-mission-objectives-and-strategy
    4 主题
  27. 7-2-assessing-the-internal-position-of-a-business
    10 主题
  28. 7-3-changes-in-the-external-environment
    7 主题
  29. 7-4-the-competitive-environment
    1 主题
  30. 7-5-investment-appraisal
    2 主题
  31. 8-1-strategic-direction
    1 主题
  32. 8-2-strategic-positioning
    2 主题
  33. 9-1-changes-in-scale
    4 主题
  34. 9-2-innovation
    2 主题
  35. 9-3-globalisation-and-internationalisation
    4 主题
  36. 9-4-digital-technology
    1 主题
  37. 10-1-managing-change
    3 主题
  38. 10-2-organisational-culture
    2 主题
  39. 10-3-implementing-strategy
    2 主题
  40. 10-4-strategic-failure
    2 主题
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Why is profit important?

  • Maximising, or increasing, profit is often a key objective for many businesses

  • Profit is important to businesses for a number of reasons

1. Financial reward

  • Profit is the financial reward that entrepreneurs receive in return for the risks they take

    • Business owners invest long hours, creativity, their own money and effort to make a successful business

2. Source of finance

  • Retained profit can be used to fund the purchase of assets, pay bills and invest in research and development

3. Indicator of success

  • Increasing profitability suggests that a business is being run effectively and could be an attractive investment

  • To determine how well a business is performing, its profit levels can be compared over time and with similar businesses

The importance of profit to other organisations

  • Some public sector organisations, such as public corporations, can have the objective of making a profit

    • Although social objectives may be more important, such as serving the local community, profits can be reinvested into services such as education and healthcare

    • These profits, known as surpluses, could also be used to improve quality and service efficiency 

  • Social enterprises also need to make a profit to survive, as they often have similar objectives to grow so they can fund their social objectives

Revenue and costs

Revenue

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

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

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

    • It is calculated using the formula

Revenue space equals space Selling space price space cross times space Quantity space sold

  • Sales revenue usually increases as the quantity sold increases

  • When a business 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 improve the tracking of sales revenue when multiple products are sold by a business

Worked Example

In 2024, Fotherhill Organics Limited sold 39,264 packs of its specialist compost to mail-order customers. The price per pack was £8.75. In addition, it sold 4,280 tonnes to gardening businesses for £123.95 per tonne.

Calculate Fotherhill Organics’ sales revenue for 2024.

[3]

Answer:

Step 1: Calculate sales revenue from the sales to mail-order customers

equals space 39 comma 264 space packs space cross times space £ 8.75 equals space £ 343 comma 560      (1)

Step 2: Calculate sales revenue from the sales to gardening businesses

equals space 4 comma 280 space packs space cross times space £ 123.95 equals £ 530 comma 506      (1) 
 

Step 3: Add together the two sales revenue figures

equals space £ 343 comma 560 space plus space £ 530 comma 506 equals space £ 874 comma 066 space        (1) 

Costs

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

Types of costs

Type

Explanation

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 5,000 

  • Examples include rent, management salaries, insurance and bank loan repayments

Variable costs (VC)

  • Costs that vary directly with the output

  • These increase as output increases and vice versa

  • Examples include raw material costs and wages of workers directly involved in production and packaging

Total costs (TC)

  • The sum of total fixed costs and total variable costs

Diagrammatic representation of costs

Fixed costs

Graph showing fixed costs at $4000, with a horizontal line across output levels. The vertical axis is labelled cost ($), and the horizontal axis is labelled output level.

  • Fixed costs do not change according to output

  • The fixed costs in this instance are $4,000

Variable costs

Graph showing total variable costs, with cost ($) on the vertical axis and output level on the horizontal axis. An upward-slanting red line indicates increasing costs as output level increases.

  • Variable costs rise proportionally with output, as shown in the diagram

  • At some point, a business may benefit from a purchasing economies, so the rise will no longer be proportional

Total costs

Graph showing cost analysis with three lines: fixed cost (horizontal), variable cost (upward sloping) and total cost (also upward sloping but above variable cost).

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

  • The total costs cannot be zero, as all organisations have some level of fixed costs

Calculating costs

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

Formulas to calculate different types of costs

Type of cost

Formula

Total costs (TC)

= Total fixed costs + total variable costs

Total variable costs (TVC)

= Variable costs per unit × quantity

Average total costs/unit cost (AC)

= Total costs ÷ quantity

Average variable costs per unit (AVC)

= Total variable costs ÷ quantity

Example: Cost calculations where VC = £60

Output (Q)

FC

TVC = £ 60 space straight x space straight Q

TC = TFC plus TVC

AVC = TVC over straight Q

AC = TC over straight Q

0

200

–

200

–

–

1

200

60

260

60

260

2

200

120

320

60

160

3

200

180

380

60

126.67

Worked Example

Rosebud Aromas manufactures luxury scented candles. The production of each candle incurs the following variable costs:

Variable cost

£ per candle

Wax

0.14

Perfume oil

0.72

Telephone bill

24.32

Glass jar

1.46

Outer packaging

0.33

Calculate the variable cost in £ for each candle.

[2]

Answer:

Step 1: Identify the variable costs in the list

  • A telephone bill is classified as a fixed cost, so it should not be included in the calculation  (1)

Step 2: Total the variable costs listed

equals space £ 0.14 space plus £ 0.72 space plus space £ 1.46 space plus space £ 0.33 space equals space £ 2.65    (1)

Measuring profit

  • Profit is the money left over after all costs have been accounted for

  • There are several different types of profit

Types of profit

Type of profit

What does it show?

How is it calculated?

Gross profit

(GP)

  • The difference between revenue and the costs directly related to production

Revenue – cost of sales

Profit from operations

(Operating profit or OP)

  • The difference between the gross profit and the  indirect expenses involved in operating the business

Gross profit – operating expenses

Profit for the year

(Net profit or NP)

  • The difference between the operating profit and any interest paid and received, as well as any one-off costs

Operating profit – (net interest + exceptional costs)

Worked Example

An e-scooter manufacturer sells its products to retailers for £180 per unit. Variable costs are ⅖ of the selling price, with monthly fixed costs being £82,000. It sells 2,200 scooters a month.

The business pays £240 interest on a mortgage each month. This year, it purchased the patent for a new type of rechargeable battery for £17,000.

Calculate the business’s profit for the year.

[5] 

Answer:

Step 1: Calculate the variable cost per unit

equals space ⅖ space of space £ 180 equals space £ 72
 

Step 2: Calculate the gross profit per unit (selling price – variable cost per unit)


equals space £ 180 space minus £ 72 equals space £ 108 space  (1)

Step 3: Calculate the gross profit per month (gross profit per unit × units sold)

equals space £ 108 space cross times space 2 comma 200 equals space £ 237 comma 600
 

Step 4: Calculate the gross profit per year (gross profit per month × 12)


equals space £ 237 comma 600 space cross times space 12 equals space £ 2 comma 851 comma 200  (1)

Step 5: Multiply the monthly fixed costs by 12 (months)


equals space £ 82 comma 000 space cross times space 12 space months equals space £ 984 comma 000

Step 6: Subtract the annual fixed costs from the annual gross profit to get the operating profit


 equals £ 2 comma 851 comma 200 space minus space £ 984 comma 000 equals space £ 1 comma 867 comma 200       (1)

Step 7: Multiply the monthly interest by 12 (months)


equals space £ 240 space space cross times space space 12 equals space £ 2 comma 880 space (1)

Step 8: Add the one-off purchase to the annual interest

equals space £ 17 comma 000 space plus space £ 2 comma 880 equals space £ 19 comma 880

Step 9: Subtract the interest and one-off costs from the operating profit to obtain the profit for the year


equals space £ 1 comma 867 comma 200 space minus space £ 19 comma 880 space equals space £ 1 comma 847 comma 320 (1)