3.3.1 - Revenue, costs and profit

Revenue from sales

Revenue measures the income earned from selling goods or services during a stated period.

For a single product sold at one price, revenue depends on both price and sales quantity.

In an illustrative month, a bicycle workshop sells 80 servicing packages for $45 each. Revenue is $45\times80=3{,}600$, or $3,600 for the month. This says nothing yet about profit: parts, wages and premises still have to be paid for. A bank loan is a source of finance, not sales revenue.

Quantity produced and quantity sold may differ. In an illustrative example, making 100 bags but selling 75 means sales revenue uses 75 bags. A higher price does not guarantee higher revenue if customers respond by buying fewer units: selling 80 packages at $45 gives $3,600, whereas selling 65 at $50 gives $3,250.

Fixed and variable costs

Costs can be classified by how they respond to changes in output over the period being considered.

An illustrative bakery's monthly premises rent remains $900 whether it makes 1,000 or 1,500 loaves. Flour and packaging are variable costs because more loaves normally require more of them. A salaried manager can be a fixed cost; wages paid per item produced can be variable. Classify the actual payment arrangement rather than assuming every wage or electricity bill has the same behaviour.

Fixed does not mean unchanged forever. Rent can rise next year; expanding into a second factory can increase fixed costs. The classification asks whether the cost changes because output changes in the stated range.

Illustrative data: a candle maker pays $600 monthly rent and uses $1.80 of wax and $0.70 of packaging per candle. Variable cost per candle is $1.80+0.70=2.50$. Producing 400 candles gives total variable cost of $400\times2.50=1{,}000$, or $1,000; the $600 rent remains fixed for this month.

Total and average cost

Total cost measures all costs for the output, while average cost spreads that total across the units produced.

For the illustrative candle maker, 400 candles have total cost $600+1{,}000=1{,}600$, or $1,600 per month. Average cost is $1{,}600\div400=4$, or $4 per candle. The fixed rent contributes $1.50 to each candle's average cost; the variable cost contributes $2.50.

At 600 candles, with the same rent and variable cost per candle, total cost becomes $600+(600\times2.50)=2{,}100$. Average cost becomes $2{,}100\div600=3.50$. Total cost rises while average cost falls because the unchanged fixed cost is spread across more units. This result depends on spare capacity and the assumed constant variable cost per unit; needing another workshop could change it.