Blog 4

Lesson: Calculating costs, revenues, and profits

Good afternoon class, my name is professor Sussman and today we will be learning about costs, revenues and profits of businesses. The objectives of today’s class: 

1. Understand the importance of profit to a business and how it is different than revenues 
2. Differentiate between fixed and variable costs. 
3. Calculate total cost and total revenue at varying outputs. 
4. Determine if a business is profitable. 
5. Understand the relationship between cost, revenue and profit.

Importance of Profit: 

Profit is the net earnings or losses by a business

This is an easy way to determine the success of a business

Profit is making back and hopefully more money than what was originally invested

Also, profit provides an owner with the opportunity to expand the business 

Key Terms: 

Profit: money left over after calculating revenue - costs. 

Profit = Total revenue – total costs 

Revenue: the value of all sales  

Revenue = price x quantity

Costs: business expenses 

Fixed costs: startup costs, which are costs that do not change with the level of output 

Variable costs: costs relating to each level of output

Total costs: fixed costs + variable costs 

Activity 1: 

Ask these questions to the class as a group. 

_____ are the expenses incurred by a business when providing a good or service. 

_____ costs stay the same regardless of _____. 

_____ costs change according to _____. 

_____ are calculated by _____ fixed costs and variable costs. 

Answers: 

1. costs
2. fixed
3. output
4. variable
5. output
6. total costs
7. adding

Student Exercise: 

Give these questions to the students to solve in the remainder of the class time. These fictional examples of business will provide them with an understanding of costs, revenues and profits in the real world. 

1. 

A) Solve the following questions relating to Tom’s Bakery. Tom wants to open and operate a bakery. He must pay $1,000 a month to rent his store location, and the baking machines cost $2,000 to purchase. However, Tom has a special muffin recipe and he only wants to produce this one item. He can purchase the indigents for a single muffin for $0.50, and can sell each muffin for $4. What are Tom’s variable and fixed costs? Also, what would his revenues and profits be if he were to produce 800 muffins? What conclusions can you draw about this business at this particular level of output?

B) Based on the answers from part A, does Tom have enough profit to reinvest into advertising? What type of costs is advertising, and when would you recommend Tom to advertise, please explain why? 

2. Solve the following questions by filling in the table with this information. Jane is an entrepreneur who has decided to create her own carbonated flavored water brand and sell the products locally? It costs Jane $1,000 for a storefront and $750 for a kitchen space each month in rent. The rental locations come total empty (with no equipment) so Jane will have to spend $500 to get the proper machinery to make her special water. Furthermore, in the town of Weston where Jane lives there is a $500 license that all food and beverage stores must have. The water will be sold in 500ml glass bottles, which will retail for $2. The glass will cost $0.02 per unit and the flavored water indigents will cost $0.05 per unit. Fill in the table below to determine the success of the business at different levels of output. 

Exercise Answers: 

1. 

A)

• variable costs: $0.50 per quantity
• fixed costs: $5,000
• total cost: 3000+(800*0.50) = $3,400
• revenue: 800*4 = $3,200
• Profit: -$200
• At this level of output this business is slightly unsuccessful due to the negative net earnings. 

B) 

When producing at a quantity of 300 muffins Tom is not profitable. To be specific, the net losses would be $200. With these losses it might be advisable for Tom to invest in advertising. Advertising is a fixed costs, meaning it is not related to the output of muffins. Advertising could help to increase his quantity of muffins sold and thus turn his net losses into profits. At first, Tom’s profits will be even less due to the added fixed cost of advertising, but ideally the advertising will increase quantity sold, thus results in a higher revenue and higher long term profits. 

2.