Fixed and variable costs, revenue, profit types and margins
📊 Core finance⏱ 18 min📝 3 practice questions
Learning Objectives
By the end of this lesson you will be able to…
Calculate total revenue using the formula Price × Quantity
Distinguish between fixed and variable costs with examples
Calculate total costs, gross profit and net profit
Calculate and interpret gross and net profit margins
Suggest ways businesses can improve profitability
Revenue
Total Revenue (Turnover)
Definition
Total revenue (also called turnover or sales revenue) is the total money received from selling goods or services. It does not deduct any costs.
Formula
Total Revenue = Selling Price × Quantity Sold
Worked Example
Selling price£25 per unit
Units sold800
Total Revenue£25 × 800 = £20,000
Revenue ≠ Profit. Revenue is the top line; profit is what's left after subtracting costs. A business with £1m revenue but £1.1m costs is making a loss.
Costs
Fixed vs Variable Costs
Fixed Costs
Do not change with output level.
Rent on premises
Salaries of permanent staff
Insurance premiums
Loan repayments
Depreciation of machinery
If output doubles, fixed costs stay the same.
Variable Costs
Change directly with output level.
Raw materials / ingredients
Packaging costs
Piece-rate wages
Delivery costs per order
Energy used in production
If output doubles, variable costs double too.
Total Costs
TC = Fixed Costs + (Variable Cost per unit × Quantity)
Profit
Gross Profit vs Net Profit
Gross Profit
Revenue − Cost of Goods Sold (COGS)
COGS = direct costs of producing the goods sold (materials, direct labour). Excludes overheads.
Profit in £ tells you how much was earned. Profit margin (%) tells you how efficiently the business generates profit relative to revenue — crucial for comparison.
Interpretation: A 15% net profit margin means for every £1 of revenue, the business keeps 15p as profit. Higher is generally better, but compare against the industry average.
Strategy
Improving Profitability
Increase Revenue
Raise prices (if demand is inelastic)
Increase sales volume through marketing
Launch new products or enter new markets
Upsell / cross-sell to existing customers
Improve product quality to command premium prices
Reduce Costs
Negotiate better deals with suppliers
Achieve economies of scale (buy in bulk)
Automate processes to reduce labour costs
Reduce waste in production (lean manufacturing)
Relocate to lower-cost premises
Exam warning: Cutting costs can backfire — lower quality may reduce sales. Raising prices may lose customers. Always evaluate the impact on both revenue and costs when assessing profitability strategies.
Practice Question 1 of 3
A business sells 500 units at £40 each. Total costs are £14,000. What is the net profit?
A£14,000
B£6,000
C£20,000
D£26,000
Correct: B — £6,000. Total Revenue = £40 × 500 = £20,000. Net Profit = Revenue − Total Costs = £20,000 − £14,000 = £6,000. Always calculate revenue first (Price × Quantity), then subtract total costs to find profit.
Practice Question 2 of 3
Which of the following is a variable cost for a bakery?
AMonthly rent on the bakery premises
BFlour, eggs and butter used in baking
CThe baker's annual salary
DInsurance for the building
Correct: B. Flour, eggs and butter are variable costs — they increase directly as the bakery produces more goods. If the bakery doubles its output, it needs twice the ingredients. Rent, the baker's salary and insurance are fixed costs that do not change with output.
Practice Question 3 of 3
A restaurant has revenue of £250,000 and a net profit of £30,000. What is its net profit margin?
A8.3%
B12%
C30%
D83.3%
Correct: A — 12%. Wait — let me recheck: Net Profit Margin = (Net Profit ÷ Revenue) × 100 = (£30,000 ÷ £250,000) × 100 = 12%. This means for every £1 of revenue, the restaurant keeps 12p as net profit after all costs are paid. (Note: Answer B is correct — 12%.)
Quick Reference
All Formulas
Revenue
Price × Quantity
Gross Profit
Revenue − COGS
Net Profit
Gross Profit − Overheads
Gross Profit Margin
(GP ÷ Rev) × 100
Net Profit Margin
(NP ÷ Rev) × 100
Total Costs
FC + (VC × Qty)
Exam approach: Show all working clearly. State each formula, substitute the values, then write the answer with the correct unit (£ or %). Never just write a number without context.