Revenue, Costs and Profit

This lesson covers the key financial concepts of revenue, costs, and profit — the calculations that underpin business decision-making. You need to understand how these are calculated, how they are related, and why they matter. This is essential material for AQA topic 3.1.1.

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Revenue

Key Definition: Revenue (also called turnover or sales revenue) is the total income a business receives from selling its goods or services. It is calculated as:

Revenue = Price per unit × Quantity sold

Example

A bakery sells 500 loaves of bread per week at £2.50 each:

Revenue = £2.50 × 500 = £1,250 per week

Important Points About Revenue

• Revenue is not the same as profit — a business can have high revenue but still make a loss if costs exceed revenue.
• Revenue can increase by raising the price per unit or by selling more units — but raising prices may reduce the quantity demanded (depending on price elasticity of demand, which you will study later).
• Some businesses have multiple revenue streams — for example, a gym earns revenue from memberships, personal training sessions, merchandise, and café sales.

Exam Tip: The terms "revenue," "turnover," and "sales" are often used interchangeably in business. In exam questions, treat them as meaning the same thing unless the question specifies otherwise.

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Costs

Costs are the expenses a business incurs in producing and selling its goods or services. Understanding the different types of cost is essential.

Fixed Costs

Key Definition: Fixed costs are costs that do not change with the level of output. They have to be paid whether the business produces one unit or one million units.

Examples of Fixed Costs
Rent on premises
Salaries of permanent staff
Insurance premiums
Loan repayments
Business rates
Depreciation of equipment

Fixed costs are sometimes called overhead costs or indirect costs.

Variable Costs

Key Definition: Variable costs are costs that change in direct proportion to the level of output. If output doubles, total variable costs double.

Examples of Variable Costs
Raw materials
Packaging
Hourly wages for production workers
Energy used in production
Distribution / delivery costs

Total Costs

Key Definition: Total costs are the sum of all fixed and variable costs at a given level of output.

Total Costs = Fixed Costs + Variable Costs

Example Calculation

A furniture manufacturer has:

• Fixed costs of £20,000 per month (rent, insurance, salaries)
• Variable costs of £150 per table produced
• Current output: 200 tables per month

Cost Type	Calculation	Amount
Fixed costs	—	£20,000
Variable costs	£150 × 200	£30,000
Total costs	£20,000 + £30,000	£50,000

Semi-Variable Costs

Some costs have both a fixed and variable element. For example:

• Electricity — there is a standing charge (fixed) plus a charge per unit of energy used (variable).
• Staff costs — salaried managers are a fixed cost, but overtime pay is variable.
• Telephone bills — a fixed line rental plus variable call charges.

Exam Tip: In calculation questions, be careful to distinguish between total variable costs and variable cost per unit. If the question says "variable costs are £5 per unit," you need to multiply by the number of units to find total variable costs.

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Profit