Chapter – 29
Sales, Revenue and Costs
Definitions
1. average cost or unit cost- the cost of producing one unit, calculated by
dividing the total cost by the output.
2. fixed cost- a cost that does not change as a result of a change in output in the
short run.
3. long run- the time period where all factors of production are variable.
4. profit (loss)- the difference between total costs and total revenue. It can be
negative.
5. sales revenue- the value of output sold in a particular time period. It is
calculated by price x quantity of output.
6. sales volume- the quantity of output sold in a particular time period.
7. semi-variable costs- costs that consist of both fixed and variable elements.
8. short run- the time period where at least one factor of production is fixed.
9. total cost- the entire cost of producing a given level of output.
[Link] revenue- the amount of money the business receives from selling
output.
[Link] costs- costs that rise as output rises.
Sales Volume
The output produced by businesses is eventually sold. Businesses measure and
monitor sales level. One approach is to measure the sales volume. This is the
number of units sold by a business. However, depending on the nature of the
business, sales volume can be measured in different ways.
Sales Revenue
Sales revenue is the value of output sold by a business. It may be calculated for a
specific time period. It can also be calculated for individual products when a
business has a wide product range. Sales revenue, which is often called total
revenue, is calculated using the following formula:
BUSINESS COSTS
A business needs accurate and reliable cost information to make decisions. For
example, a firm that is aiming to expand production or deliver more services to
meet rising demand must know how much that extra output will cost. In the same
way that you are familiar with your own personal costs - these are the regular
expenses you have, such as travel to school or college - so businesses will know
what their expenses are. These might include wages, raw materials, insurance and
rent.
It is important to understand how the costs of a business change in the short run
and the long run. • The short run is the period of time when at least one factor of
production is fixed. For example, in the short run, a firm might want to expand
production in its factory. It can acquire more labour and buy more raw materials,
but it has a fixed amount of space in the factory and a limited number of machines.
Fixed Costs
Costs that stay the same at all levels of output in the short run are called fixed
costs. These costs remain the same whether a business produces nothing or is
working at full capacity.
Variable Costs
Costs of production, which increase directly as output rises are call variable costs.
If the firm does not produce anything then variable costs will be zero.
Total Costs
If fixed and variable costs are added together they show the total cost of a business.
The total cost of production is the cost of producing any given level of output. As
output increases total costs will rise.
Average cost or unit cost
The average cost is the cost per unit of production, also known as the unit cost. To
calculate average cost, the total cost of production is divided by the number of
units produced.
Profit and loss
One of the main reasons why firms calculate their costs and revenue is to enable
them to work out profit or loss. Profit is the difference between revenue and cost.
WAYS OF IMPROVING SALES VOLUME
Most businesses will be keen to improve sales volumes providing they have
enough capacity. A number of approaches could be used, some of which are
discussed briefly below.
Advertising: Businesses will tend to sell more output if they increase expenditure
on advertising. The main aim of all methods of advertising is to increase sales
volume. Different businesses and industries are likely to have their own preferred
methods. For example, many global car manufacturers like to use television
adverts. This is because the performance of a car can be demonstrated using
moving images. Many small businesses rely on much cheaper advertising media
such as adverts in local newspapers.
Promotion: Businesses can choose from a wide range of different methods of
promotion to help increase sales volumes. Examples might be coupons,
sponsorship, free gifts, loyalty schemes, PR, merchandising or direct mailing. One
very popular method used in supermarkets to increase sales volume is BOGOF
offers. This type of offer might even double sales volumes for a period of time.
Businesses must monitor carefully the impact on profit of increased expenditure on
advertising and promotion when trying to lift sales volumes. Heavy expenditure on
advertising and promotion may have a negative impact on profit even though sales
volumes rise.
Improved targeting: Businesses are likely to increase sales volumes if their
advertising and promotion is more targeted. That means that it should be aimed
more accurately at the people who are most likely to purchase the product.
Extend product range: Another approach to increasing sales volumes is to increase
the range of products for sale.
Extend distribution networks: If businesses are successful using one method of
distribution, they might consider others to boost sales volumes.
Develop relationships with customers: By engaging more with customers
businesses might be able to improve customer retention and encourage repeat
purchases. This would increase sales volumes. Ideally a business would want to
attract a new customer and then keep them for life. In an effort to achieve this
businesses try to develop relationships with them. To do this businesses would
have to communicate effectively with customers, learn as much as possible about
their customers, respond effectively to customer complaints, build customer trust
and stay in regular touch without being intrusive. Many businesses have found that
exchanging information with customers using social media has helped to develop
relationships.
IMPROVING SALES REVENUE
Most of the methods discussed above to boost sales volumes can also help to raise
sales revenue. However, businesses might use specific strategies to generate more
sales revenue. Two additional methods can be identified.
Changing price: A change in price is likely to have an impact on sales revenue.
Both a price increase and a price decrease might boost sales revenue. It depends on
whether demand for a product is price elastic or price inelastic.
Raising price. A business can increase revenue by raising price if demand is price
inelastic.
Lowering price. A business can only increase revenue with a price cut if demand is
price elastic.
Adding complementary services or products: A business can generate more sales
revenue if it can persuade customers to buy additional services or products that are
related to the core product. For example, revenue might be increased if a:
shoe retailer can also sell shoe-cleaning materials and other footwear
accessories
car dealer can also sell a credit agreement and warranties
short-haul airline charges extra for preferred seats, travel insurance, food and
beverages during the flight and carrying extra luggage
computer retailer can also sell software, insurance and protection from
malware and viruses
garden-maintenance provider can also sell plants, fertilisers and more
specialist garden services such as tree felling or garden design.