Calculation of costs and revenue
Calculating costs
The that a business incurs can be found by adding together their total fixed costs and their total variable costs:
Total costs = fixed costs + variable costs
Question
A small sandwich shop pays rent of £10,000 per year on their premises. During the year they spend £15,000 on bread and £20,000 on sandwich fillings. Their insurance cost £3,000 and they packaging materials cost £5,000. Calculate:
- The total fixed costs incurred by the sandwich shop
- The total variable costs incurred by the sandwich shop
- The total costs incurred by the sandwich shop
Total sales revenue
Total sales revenue is the money received from the sales of any goods or services that a business provides. It is money that is coming into the business, and as such it is a form of income.
Calculating revenue
Total sales revenue is calculated using the following formula:
Total sales revenue = Price × Quantity
This shows that the amount charged for a product or service will affect how much customers are willing to buy. This will affect the amount of revenue that a business receives.
For example, a business selling pens estimates that if it charges £1 for a pen, it will be able to sell 1,000 pens. However, if they charge £2 per pen they may only sell 600 pens. Calculating the total sales revenue that they might receive can help them to make a decision:
| Price | Estimated quantity | Estimated total revenue |
| £1 | 1,000 | £1,000 |
| £2 | 600 | £1,200 |
| Price | £1 |
|---|---|
| Estimated quantity | 1,000 |
| Estimated total revenue | £1,000 |
| Price | £2 |
|---|---|
| Estimated quantity | 600 |
| Estimated total revenue | £1,200 |
This shows that the business would expect to receive more sales revenue if they charged £2 per pen.
