Business Costs There are three main types of business costs.

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Variable costs - These are also incurred once a business is operating. This time the amount spent directly relates to the number of products sold or the amount of services provided. The number of tyres bought by a car manufacturer depends on the number of cars made. This is why variable costs are also called direct costs. They increase in direct proportion to the level of activity. A jeans manufacturer producing 200 pairs of jeans would use twice as much fabric and buttons or zips than one producing a hundred. Variable costs are calculated in this way:

Variable cost of each product x number produced

As an example, if an ice cream cone cost 4p and the ice cream filling was 10p then the variable cost for each filled cone sold would be 14p. If a shop sold 200 cones in a day, the total variable cost for that day would be:

14p x 200 = 2800p = £28.00

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Total costs - Businesses need to know how much money they are spending altogether and how much they're going to pay, i.e. total costs. This is the total fixed costs and the total variable costs added together.

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Key terms

a) Start-up costs are costs incurred before a business starts or when it is expanding or going into a new venture.

b) Operating costs are costs a business incurs once it is up and running. Variable and fixed costs added together are known as operating or running costs.

Revenue

Revenue is the income received by a business from all sources.

Sales - These are the main source of revenue for most organizations because customers pay for the goods or services they buy.

Leasing - It's a part of a building lent to another business. This can also provide a source of income. Some businesses specialize in leasing cars and equipment to other organizations.

Business may also sell items they no longer need to other firms, such as equipment or vehicles that are being replaced.

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Calculating Total Revenue

To do this you need two items of information:

a) The selling price

b) The number sold

You then use the following formula:

Total income = selling price x number sold

Therefore, an ice cream business which prices its cones at £1 and sells hundred will have a total income of £100.

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Calculating Gross and Net profit

Gross profit

Gross profit is the amount of money remaining from sales income when the cost of materials purchased is deducted. For example, a newsagent might receive £4,000 income in a week from selling papers, magazines, sweets and other items. If it costs her £2,500 to buy these goods then the gross profit for that week is:

£4,000 - £2,500 = £1,500

The amount spent by the newsagent on the papers, sweets and other stock is called cost of sales. So the formula for calculating gross profit is:

Gross profit = Sales income - Cost of sales

Net profit

Net profit is calculated by subtracting other expenses from the gross profit. If the newsagent spends £1,000 on operating costs such as business rates, wages for part time staff, heating, rent, business rates etc., the net profit is:

£1,500 - £1,000 = £500

So, the formula for the calculating net profit is

Net profit = Gross profit - Operating costs

Milla Jay

UNIT 3.1

Understanding costs, revenue and profit for business.