Financial calculations and average rate of return

Overview

Revenue, costs and profit worked through takeaway and market-stall examples, how changes in rent or unit costs affect profit, and the average rate of return calculated, compared and questioned.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   A takeaway sells 2,000 meals a month at £8 each. Its fixed costs are £5,000 a month and its variable costs are £4 per meal. What is its monthly profit?

   Model answer

   The takeaway's monthly profit is £3,000. Revenue is £16,000 and total costs are £5,000 + £8,000 = £13,000.

2. 2

   A market stall has revenue of £2,400 and total costs of £2,900 in a month. What has it made?

   Model answer

   The stall has made a loss of £500. Total costs exceed revenue, since £2,400 − £2,900 = −£500.

3. 3

   How are total variable costs calculated, and why do they rise with output?

   Model answer

   Total variable costs equal variable cost per unit multiplied by output. Every extra unit needs more materials, packaging and energy.

4. 4

   A bakery's rent rises from £1,200 to £1,500 a month. Which type of cost has changed, and what happens to profit?

   Model answer

   Rent is a fixed cost, so fixed costs rise by £300 a month. Profit falls by £300 a month if nothing else changes.

5. 5

   A T-shirt printer's variable cost per shirt falls from £5 to £4, and it sells 1,000 shirts a month. How does its profit change?

   Model answer

   Profit rises by £1,000 a month. Total variable costs fall from £5,000 to £4,000.

6. 6

   How does a price rise affect revenue and profit?

   Model answer

   A price rise increases revenue per unit, but fewer units may be sold. Profit rises only if the extra revenue per unit outweighs the fall in sales.

Other ways to work this

The same content, four other ways.

What is inside Levo

Six ways to work the same material.