Revenue, Costs & Profit

Understanding revenue, costs, and profit is fundamental to GCSE Business Studies. This lesson explains how each is calculated, the different types of costs, and how businesses use these figures to make decisions.

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Key Financial Terms

Term	Definition	Formula
Revenue	The total income a business earns from selling its products (also called turnover)	Revenue = Price × Quantity Sold
Fixed costs	Costs that stay the same regardless of how much is produced	e.g. rent, insurance, salaries
Variable costs	Costs that change in proportion to the amount produced	e.g. raw materials, packaging, delivery
Total costs	The sum of all fixed and variable costs	Total Costs = Fixed Costs + Variable Costs
Profit	The money left after all costs have been deducted from revenue	Profit = Revenue − Total Costs
Loss	When total costs exceed revenue	Loss occurs when Revenue < Total Costs
Interest	The cost of borrowing money	Calculated as a percentage of the loan

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Revenue

Revenue (also called turnover or sales revenue) is the total income a business receives from selling its goods or services.

Formula: Revenue = Selling Price × Quantity Sold

Worked Example

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

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

If the bakery increases the price to £3.00 but sells only 400 loaves:

Revenue = £3.00 × 400 = £1,200 per week

The price increase led to lower revenue because the drop in quantity sold more than offset the higher price.

Exam Tip: Revenue is NOT the same as profit. Revenue is the total money coming in; profit is what remains after costs are deducted. This is a very common mistake in exams.

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Costs

Fixed Costs

Fixed costs do not change with the level of output. They must be paid regardless of whether the business produces anything.

Examples: rent, insurance premiums, salaries, loan repayments, business rates.

Variable Costs

Variable costs change in direct proportion to the level of output. The more a business produces, the higher its variable costs.

Examples: raw materials, packaging, delivery charges, hourly wages, electricity used in production.

Total Costs

Total Costs = Fixed Costs + Variable Costs

Worked Example

A t-shirt manufacturer has:

• Fixed costs: £5,000 per month (rent, insurance, salaries)
• Variable costs: £3 per t-shirt (fabric, printing, packaging)

If it produces 2,000 t-shirts in a month:

• Variable costs = £3 × 2,000 = £6,000
• Total costs = £5,000 + £6,000 = £11,000

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Profit

Profit = Revenue − Total Costs

Types of Profit

Type	Formula	What It Shows
Gross profit	Revenue − Cost of sales	Profit from buying and selling before other expenses
Operating profit	Gross profit − Operating expenses	Profit after day-to-day expenses (rent, wages, etc.)
Net profit	Operating profit − Tax − Interest	The final profit after all deductions

Worked Example: Calculating Profit

A coffee shop has the following monthly figures:

• Revenue: £20,000
• Cost of sales (coffee beans, milk, cups): £6,000
• Operating expenses (rent, wages, utilities): £10,000
• Tax and interest: £1,000

Calculation	Amount
Revenue	£20,000
− Cost of sales	£6,000
= Gross profit	£14,000
− Operating expenses	£10,000
= Operating profit	£4,000
− Tax and interest	£1,000
= Net profit	£3,000

flowchart TD
    A["Revenue<br/>= Price x Quantity"] --> B{"Subtract<br/>Cost of Sales"}
    B --> C[Gross Profit]
    C --> D{"Subtract<br/>Operating Expenses<br/>rent, wages, utilities"}
    D --> E[Operating Profit]
    E --> F{"Subtract<br/>Interest + Tax"}
    F --> G["Net Profit<br/>’The bottom line’"]
    H["Fixed Costs<br/>rent, salaries, insurance"] --> I[Total Costs]
    J["Variable Costs<br/>materials, packaging"] --> I
    I -.compared with.-> A
    A -. if Revenue greater than Total Costs .-> K[PROFIT]
    A -. if Revenue less than Total Costs .-> L[LOSS]

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Profit Margins

Profit margin measures profit as a percentage of revenue. It shows how much profit a business makes for every £1 of sales.

Margin	Formula	Example
Gross profit margin	(Gross Profit ÷ Revenue) × 100	(£14,000 ÷ £20,000) × 100 = 70%
Net profit margin	(Net Profit ÷ Revenue) × 100	(£3,000 ÷ £20,000) × 100 = 15%

A high profit margin means the business is efficient at converting revenue into profit. A low margin may indicate high costs or low prices.

Exam Tip: Always show your working in calculation questions. Even if your final answer is wrong, you can still gain marks for the correct method.

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How Businesses Can Improve Profit

1. Increase revenue — raise prices (if demand is price inelastic), sell more units, or enter new markets.
2. Reduce variable costs — find cheaper suppliers, negotiate better deals, reduce waste.
3. Reduce fixed costs — move to cheaper premises, reduce staffing, renegotiate contracts.
4. Improve efficiency — use technology to reduce costs and increase output.
5. Increase value added — improve the product so customers are willing to pay more.

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Summary

• Revenue = Price × Quantity Sold (total income from sales).
• Fixed costs stay the same regardless of output; variable costs change with output.
• Total Costs = Fixed Costs + Variable Costs.
• Profit = Revenue − Total Costs.
• Gross profit, operating profit, and net profit measure profitability at different levels.
• Profit margins express profit as a percentage of revenue.
• Businesses improve profit by increasing revenue, reducing costs, or improving efficiency.

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UK case study: Tesco's revenue, costs and profit under the microscope

Tesco is the UK's largest supermarket chain, with a market share of around 28% and revenue of over £65 billion per year. Its income profile provides a vivid example of how revenue, costs and profit interact in a major UK business — and why profit margin matters more than absolute profit figures.