finance 5.3

• What is revenue in a business context?

  Money generated from selling goods and services
• How is revenue calculated?

  Revenue = price (P) X quantity sold (Q)
• What are the two types of costs?

  Fixed costs and variable costs
• What are fixed costs?

  Costs that do not change as the level of output changes
• What is an example of a fixed cost?

  • Rent
  • heating and lighting
  • wages
• What are variable costs?

  Costs directly related to output
• What is an example of a variable cost?

  • raw materials
  • transport
• How are total costs calculated?

  Total costs = fixed costs + total variable costs
• What is profit in a business context?

  Money left after deducting costs from revenue
• What happens if revenue is greater than costs?

  The business generates a profit
• What are the two types of profit?

  Gross profit and net profit
• How is gross profit calculated?

  Gross profit = revenue - cost of sales (total variable costs)
• How is net profit calculated? (2 ways)

  Net profit = total revenue - total costs

  Net profit = gross profit - fixed costs
• What are profitability ratios?

  Ratios comparing profit with revenue
• What are the two profitability ratios?

  Gross profit margin and net profit margin
• How is gross profit margin calculated?

  (Gross profit / revenue) X 100
• How is net profit margin calculated?

  (Net profit / revenue) X 100
• Why is net profit margin always lower than gross profit margin?

  Net profit includes all costs
• How are total variable costs calculated?

  Variable costs for one unit X quantity sold
• What is the purpose of profitability ratios?

  to measure how successfully a business converts revenue into profit
• What does a gross profit margin of 81% mean?

  81p of every £1 in revenue is gross profit
• What does a net profit margin of 9.5% mean?

  9.5p of every £1 in revenue is net profit
• How can a business reduce variable costs?

  • purchase in bulk to take advantage of lower unit prices
  • Buy cheaper stock
  • Seek new suppliers
• How can a business reduce fixed costs?

  • relocation
  • Turn heating off , lighting etc
• What is the formula for revenue ?

  Selling price x quantity sold
• What are 2 ways revenue can be increased with examples?

  • selling more items - as long as selling price isn’t reduced - eg. engaging in more promotional activity , seeking new outlets like online selling, selling a wider range of products and repackaging products
  • raising selling price - as long as it has minimal effect on volume of items sold
• What is gross profit ?

  The difference between revenue and the costs directly related to production
• What is net profit?

  The difference between gross profit and the indirect expenses of the business
• What are the ways profit can be increased?

  • increasing revenue
  • Reducing costs
  • A combination of both
• What is making a loss?

  If costs are greater then revenue
• What are the 3 impacts of making a loss?

  • Lack of finance to grow
  • Need to cut costs
  • Need to raise income
• Formula for ARR?


  Average Rate of Return = average yearly profit / cost of investment x 100
• Advantages of ARR?


  • considers all profit generated from an investment over time
  • Easy to understand
  • east to compare percentage returns of different investments
• Disadvantages of ARR?


  • it is an AVERAGE- return may be lower in some years and higher in others
  • ARR based on an investment project which lasts for many years, many factors could change. Eg. Might be A recession or pandemic where income is demand May fall so income lower than expected