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Costs and Revenue
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Teaching Business
Costs and Revenue
A complete guide to costs and revenue — covering fixed costs, variable costs, total costs, sales revenue, average revenue, contribution and how these concepts support business decision-making.
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Created by an experienced Head of Business and examiner
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AQA | Edexcel | Cambridge | Eduqas | WJEC | OCR | GCSE
KEY POINTS
Costs are the expenses a business incurs when producing and selling goods or services.
Fixed costs do not change directly with output in the short run.
Variable costs change as output increases or decreases.
Total costs are calculated by adding fixed costs and variable costs.
Revenue is the income a business receives from selling goods or services.
Total revenue is calculated by multiplying selling price by quantity sold.
Contribution per unit is calculated by subtracting variable cost per unit from selling price.
Understanding costs and revenue helps businesses make decisions about pricing, output, profit and break-even.
KEY DEFINITION
Costs and Revenue
Costs are the expenses involved in running a business, while revenue is the income earned from selling goods or services.
Main Explanation
Costs and revenue are two of the most important financial concepts in business. Costs show how much money a business spends to produce, sell and operate, while revenue shows how much money the business receives from sales. The relationship between costs and revenue helps determine whether a business makes a profit or loss.
Fixed costs are costs that do not change directly with output in the short run. Examples include rent, insurance, salaries, loan repayments and equipment leasing. A business must usually pay fixed costs even if it produces or sells very little.
Variable costs change as output changes. For example, a bakery that produces more cakes will need more flour, sugar, packaging and possibly more hourly labour. These costs increase when production rises and fall when production decreases.
Total costs are calculated by adding fixed costs and variable costs together. This helps a business understand the full cost of producing a certain level of output. If total costs are higher than revenue, the business will make a loss. If revenue is higher than total costs, the business will make a profit.
Revenue is the income a business earns from selling goods or services. Total revenue is calculated by multiplying selling price by quantity sold. For example, if a business sells 500 products at £20 each, total revenue would be £10,000.
Understanding costs and revenue supports many business decisions. It helps managers set prices, control spending, calculate break-even output, judge profitability and decide whether increasing output is financially worthwhile.
✎ EXAMINER TIP
Students often confuse revenue with profit. Revenue is the income from sales before costs are deducted, while profit is what remains after costs have been subtracted. Always identify whether a question is asking about sales income, costs, contribution or profit before starting a calculation.
KEY FORMULAS(s)
Profit and Profitability Formulas
These key formulas help you calculate different profit measures and profitability ratios used in business.
Gross Profit
Gross profit = Revenue − Cost of sales
The profit made after deducting direct costs.
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Remember: profit shows how much money has been made, while profitability shows how efficiently revenue is being turned into profit.
DATA TABLE
Income Statement for North Coast Coffee Ltd
This statement shows how revenue is converted into gross profit, operating profit and net profit.
Revenue
£250,000
Output
Fixed Costs
Variable Costs
Total Costs
Revenue
Profit / Loss
0 candles £1,200 £0 £1,200 £0 -£1,200
Net profit is the final profit remaining after all costs and expenses have been deducted from revenue.
WORKED EXAMPLE
Worked Example: North Coast Coffee
How many coffees must be sold to break even?
Fixed Costs
£1,800
equity + long-term debt
Break-even output = Fixed costs ÷ Contribution per unit
Contribution per unit = Selling price − Variable cost
£3.50 − £1.10 = £2.40
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Step 1: Calculate contribution
£3.50 − £1.10 = £2.40
Contribution per unit is the amount each coffee contributes towards fixed costs.
BREAK-EVEN OUTPUT:
750 coffees per month
EXAM TIP
Always explain what the number means for the business. Do not just calculate the break-even point.
Costs and Revenue Overview
Costs and revenue are the ultimate determining factors in whether a business makes a profit or a loss. A business earns profit when total revenue is greater than total costs.
APPLICATION
Greggs' Costs and Revenue
Greggs is a major UK food-on-the-go retailer that sells products such as sandwiches, sausage rolls, pastries, drinks and sweet treats through a large network of shops. The business earns revenue from selling products to customers every day, but it also faces significant costs such as ingredients, packaging, staff wages, rent, energy bills, transport and store operations.
Understanding costs and revenue is important for Greggs because small changes in costs or selling prices can affect profitability across many stores. For example, if the cost of ingredients, wages or energy rises, Greggs may need to decide whether to absorb the extra cost, improve efficiency or increase prices. However, if prices rise too much, some customers may reduce how often they buy.
This shows why businesses need to monitor costs and revenue carefully. Greggs must balance keeping prices attractive for customers with covering costs and protecting profit margins.
This independent educational case study is not affiliated with, endorsed by or sponsored by Greggs plc. Any financial figures used alongside this example should be treated as simplified or hypothetical estimates created for teaching purposes.
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ANALYSIS
EXAM FOCUS
Analysis questions require you to examine a business concept or issue in detail, breaking it down into its component parts. You should explain how and why something happens and consider its impact on the business.
How to Approach Analysis Questions
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Identify the key issue or concept
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Break it down
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Explain how and why
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Reach a reasoned conclusion
Read the question carefully and highlight the focus of the analysis.
Consider the different factors, causes or impacts related to the issue.
Provide clear explanations using business terms and links points to context.
Evaluate the overall implications for the business.
Example Analysis Question
North Coast Coffee is considering using break-even analysis before opening a second café.
Advantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Disadvantages
• Sales forecasts may be inaccurate.
• Assumes costs and revenue remain constant.
• External factors may reduce reliability.
• Ignores qualitative business factors.
Key Exam Tip
If you find it difficult to expand your answer and show the type of depth that an examiner is looking for in a top response, consider using the 'so what' approach.
Tesco carry out market research - so what? - this allows them to better understand customer needs - so what? as a result Tesco can provide goods more likely to sell - so what? - this will increase Tesco profit and ensure higher levels of customer satisfaction - so what? this means that customers are likely to become more loyal to Tesco.
Avoid These Exam Traps
Students often lose marks on calculation and analysis questions by making these mistakes. Watch out for them in your exam!
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Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
2
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
3
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Tip:
Helvetica Light is an easy-to-read font, with tall and narrow letters, that works well on almost every site.
Be precise. Read the question carefully. Show your working.
Small mistakes can cost big marks.
EXAM PRACTICE
Practice Question
Apply your knowledge of profit and profitability to answer this exam-style question.
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MINI CASE STUDY
North Coast Coffee Ltd is a premium coffee business which sells freshly roasted coffee beans through its online store and a small chain of independent cafés. The business has experienced strong sales growth due to increasing demand for high-quality speciality coffee products.
The business generates annual revenue of £250,000. Its cost of sales, including coffee beans, packaging and direct production costs, totals £100,000. North Coast Coffee Ltd also faces operating expenses of £80,000, including marketing, employee wages, rent and administration costs. In addition, the business pays £20,000 in interest and taxation each year.
The owner, Mia Thompson, is reviewing the company’s profitability because rising wage costs and increased competition in the premium coffee market have started to place pressure on operating profit margins. She is considering increasing prices slightly in order to protect profitability while still maintaining customer demand.
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EXAM QUESTION
Analyse the possible reasons for BrightBite’s falling profit margins and evaluate strategies it could use to improve profitability.
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HOW TO ANSWER
P
Point
E
Explain
A
Apply
C
Consequence
H
However...
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MODEL ANSWER
P
Point
Increasing prices could improve the profitability of North Coast Coffee Ltd because each sale would generate a larger amount of revenue and potentially increase profit margins.
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EXAMINER TIP
For full marks, make sure you analyse causes rather than just listing them, and evaluate realistic strategies with clear judgement. THINK: Which strategy would have the biggest impact and why?
CALCULATOR
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