1.3.2 business revenues, costs and profits€¦ · remember, fixed costs are those costs that stay...
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PuttingaBusinessIdeaintoPractice1.3.2Businessrevenues,costsandprofit
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Keyelementstothistopic
CostsRevenue Profits
ConceptandCalculation
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Whatisrevenue?
Revenueistheincomegainedbyabusinessfromsellinggoodsandservices.Itisa
formofcashinflow.
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Howisrevenuegenerated?
Bothnewandestablished businesseswillgeneraterevenuefromtrading,e.g.,sellinggoodsandservices.
Cashinflowsfromnon-tradingsourcesarenotclassedasrevenue,e.g.,loansreceived,saleofassets,ownerscapitalinjectedintothebusiness.
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RevenueFormula
Revenue=PricexQuantity
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Whatdoesrevenuelooklike?
Totalrevenuerisesindirectproportiontothequantitysold.
At0unitsofsale,totalrevenueis£0.At10unitsofsale,revenueis£40.
Whatisthesellingprice?
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TheStart-UpofMuddyBootsFoodCompany
RolandandMirandaBallardgrewtiredofcorporatelifeanddecidedtosetupanewbusiness,makingandsellinghighqualityburgers
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1. CalculateMuddyBootsrevenue forMarch.
2. WhatotherinformationdoyouneedtoknowinordertodecidewhetherornottheMuddyBootsbusiness isprofitable?
Example:
MirandaanticipatesthaninMarchtheywillsell400burgerpacks,charging£3.00perpack.
TimetoCalculate
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CalculatingRevenue
MarchQuantity sold(units)(Q)Selling priceperunit(SP)REVENUE (QxSP)
400£3
£1200
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Whatwouldhappenif?
Miranda’smeatsupplierhasincreasedthepriceofthebeefmincetheyuse.Mirandadecidestoincreasethepriceofherburgerpacksto£3.50.RecalculatetherevenueforMarch
MarchQuantity sold(units)(Q)Selling priceperunit(SP)REVENUE (QxSP)
400£3.50£1400
Extensioncalculation– Calculatethepercentageincreaseinrevenueasaresultoftheincreaseinprice
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WhatareCosts?
Thespendingthatoccurstosetupandruna
business
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FixedCosts VariableCostsCostswhichchangeasaresultofchangesin
output
Costswhichdonotchangeinrelationto
output
Identify2examplesoffixedcosts
Identify2examplesofvariablecosts
BusinessCosts
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FixedCosts VariableCostsExamples:
RawmaterialsOtherboughtinsuppliesWageslinkedtooutput
Examples:Rent&ratesforpremisesWagesandsalariesnot
linkedtooutputMarketingcosts
InsuranceProductdevelopment
costs
BusinessCosts
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MuddyBootsCosts
Remember, fixed costs are those costs that stay the same no matter how many burgers the business makes and sells.
Muddy Boots variable costs are spent on items that will need a greater quantity as the number of burgers increases. So as the output increases the amount spend on variable costs increases
Yourchallengeistoidentifytheirfixedandvariablecostsonthenextslide
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IdentifytheFixed(F)andVariableCosts(C)
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TaketheTrapDoorChallenge
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presentsStayawayfromthe
pressspacebartobegin
Somewheredeepintheforestyouhavefoundalogcabin.
Insidethecabinisasetoftrapdoors.Someofthetrapdoorsarefine.However,othersleadtoa
deepdarkdungeon!Stayawayfromthetrapdoor!
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WebsitedesignLegal&accountingfees
PieceratepayforpackagingstaffMeat
Roland&Miranda’ssalary
Standfeesatmarkets
Costofbuildingcommercialkitchen
Onions
AdvertisingDevelopment&trademarkingofbrand/logo
Insuranceforproperty/equipm
entVanfordeliveries
WasteproductsattestingstageHerbsPublicliability
insurancePackaging
WhichoftheseisaFIXEDCOSTtoMuddyBootsBurgers?
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TotalCostsFormula
TOTALCOSTS=Totalfixedcosts+Totalvariablecosts
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TimetoCalculate
Packaging £0.15 perpack
Insurance £50
Advertising £30
Onions £0.10perpack
Meat £0.80 perpack
Herbs £0.05 perpack
MarketStandfees £150
Salary £700
Pieceratepayforpackagingstaff
£1.50perpack
Legal andaccountingfees £50
Miranda identified the following costs for March. She anticipates 400 packs will be sold
Calculate:
1. TotalFixedCosts
2. TotalVariableCosts
3. TotalCosts
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TimetoCalculate
Insurance £125Advertising £30Salary £700Legal andaccountingfees £50MarketStandFeesTotal FixedCosts
TotalFixedCosts
£200£1,105
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Calculatethevariablecostsperpack
CostPackaging £0.15 perpackOnions £0.10perpackMeat £0.50 perpackHerbs £0.02 perpackPieceratepayforpackaging staff £1.50perpackVariable costperpack £2.27
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TotalMuddyBootCosts
MarchVariable costsperunit(VC) £2.27TOTAL VARIABLE COSTS(QxVC) £908FIXED COSTS £1105TOTALCOSTS(FC+VC) £2103
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WhatisProfit?
Thedifferencebetweentotalrevenueandtotal
costsTherewardforriskstaken
byentrepreneurs
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ProfitFormula
Profit=TotalSales– TotalCosts
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Revenue,CostsandProfit
Revenue Total costs Profitorloss?£100,000 £75,000 £25,000=PROFIT£100,000 £100,000 £0=BREAKEVEN£100,000 £125,000 (£25,000)=LOSSIfrevenueisgreaterthantotalcosts=PROFITIf revenueis lessthantotalcosts=LOSSIf revenueisequaltototalcosts=BREAKEVEN
Note:negativefiguresareshowninbrackets
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AProfitableMarchforMuddyBoots?
DidMuddyBootsmakeaprofitinMarchusingthenew£3.50price?
Calculatethetotalprofit/loss
Profit/Loss(revenuelesstotalcosts)
£1400(revenue)– 2103(totalcosts)
Profit/Loss=(£703)
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SuggestthreewaysMirandacouldimprove
theprofitabilityofMuddyBoots
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