Sales, revenue and costs

Learning Objective
1. Calculating sales volume and sales revenue.
2. Calculating fixed and variable costs.
 Sales volume
• Sales volume is the Type of business How sales volume
is measured
number of units sold
Cereal farmer Tonnes of wheat
by a business. sold

Car manufacturer Number of cars

sold

However, in some cases it is difficult Airline Number of

to identify single units of output. passengers carried

Oil company Barrels of oil sold

Hotel Number of rooms

let
Sales revenue
• Sales revenue (total
revenue) is the value
of output sold by a
business. It may be
calculated for a
specific time period,
such as a day, week,
month or year.
Sales revenue = Price
× Quantity of output
Business costs
• A business needs accurate and reliable cost
information to make decisions.
• It is important to understand how the costs of a
business change in the short run and the long run.
• The short run is the period of time when at least one
factor of production is fixed
• In the long run, all factors can vary. The firm can
buy another factory and add to the number of
machines. This will increase capacity (the maximum
amount that can be produced) and begin another
short-run period.
Fixed costs
• Costs which stay the same at all levels of
output in the short run are called fixed
costs.
• These costs remain the same whether a
business produces nothing or is working
at full capacity.
• ‘Fixed’ here means costs do not change
as a result of a change in output in the
short run.
Horizontal line fixed cost graph
 ‘Stepped’ fixed costs
• If a firm is at full
capacity, but
needs to raise
production, it
might decide to
invest in more
equipment
Examples
• It might be rent, insurance, heating bills,
depreciation and business rates, as well
as capital costs such as factories and
machinery.
Variable costs
• Costs of production which increase directly
as output rises are called variable costs.

• If the firm does not produce anything then

variable costs will be zero.
Examples
• Raw materials are just one example of
variable costs. Others might include fuel,
packaging and wages.
Variable cost of Doll manufacturer
Total cost
• The total cost of production is the cost of
producing any given level of output.

• As output increases total costs will rise

Total cost (TC) = Fixed cost (FC) + Variable
cost (VC)
Notice that
• As output increases fixed costs become a
smaller proportion of total costs.
Total cost of Doll manufacturer
Average cost or unit cost
• The average cost is the cost per unit of
production, also known as the unit cost.
• To calculate average cost, the total cost of
production should be divided by the number
of units produced, or output.
Average cost = Total cost
Output
Profit and loss
• One of the main reasons
why firms calculate their
costs and revenue is to
enable them to work out
their profit or loss.
• Profit is the difference
between revenue and
costs.
Profit = total revenue
– total costs