Costs, Revenue & Profit (Years 8–11) — Business Studies

Fixed, variable and total costs; revenue; and profit calculated as revenue minus total costs.

Every business must understand its costs and its revenue to know whether it is making a profit. These figures guide pricing, output and survival decisions.

Why this matters A business that does not track costs and revenue cannot tell if it is trading successfully. Getting these numbers right is the difference between profit and loss.

Fixed and variable costs

Fixed costs do not change with the level of output, such as rent, insurance and manager salaries. They must be paid even if nothing is made.
Variable costs rise and fall with output, such as raw materials and packaging. Making more units costs more in materials.

Total cost and revenue

Total cost = fixed costs + total variable costs
Total variable cost = variable cost per unit × units made
Revenue = selling price × quantity sold

Suppose a stall sells honey at £6 a jar and sells 100 jars. Revenue = £6 × 100 = £600.

Calculating profit

Profit = total revenue − total cost

Using the honey stall: if fixed costs are £150 and the variable cost is £2 per jar, then total variable cost = £2 × 100 = £200, so total cost = £150 + £200 = £350. Profit = £600 − £350 = £250. If total cost were higher than revenue, the business would make a loss.

Profit is the gap between total revenue and total cost, where total cost itself is built from fixed cost plus total variable cost.

Item	Amount
Revenue (£6 × 100)	£600
Fixed cost	£150
Variable cost (£2 × 100)	£200
Total cost	£350
Profit	£250

Using these figures

Managers use cost and revenue data to set sensible prices, decide how much to produce, and spot where to reduce spending. If costs rise, a firm can look for a cheaper supplier or reduce waste; if revenue falls, it can review its price or its marketing. Comparing this month's figures with last month's, or with a rival's, shows whether the business is improving. Honest, careful record-keeping is also a duty owed to customers, suppliers and the tax authorities, and it supports fair trading and steady, well-planned growth rather than guesswork.

Put these steps in order to calculate the honey stall's profit:

Calculate revenue (selling price × quantity sold)
Calculate total variable cost (variable cost per unit × quantity made)
Calculate total cost (fixed costs + total variable cost)
Calculate profit (total revenue − total cost)

Common exam mistake: using the variable cost per unit instead of the total variable cost when working out total cost. Always multiply the variable cost per unit by the number of units first — forgetting this step is one of the most common lost marks in cost and profit questions.

Exam technique: always write out each stage of the calculation on its own line — revenue, then total cost, then profit — so you pick up method marks even if an earlier figure is wrong.