Unit 6 Finance · Free revision notes
6.2.1 Financial Terms and Calculations
Last updated 11 May 2024 · ~3 min read
Sales Revenue
Sales Revenue is the total amount of money a company generates from selling its goods or services.
Sales Revenue = Quantity Sold x Selling Price
Example: If a company sells 1000 units of a product at a selling price of £50 per unit, its Sales Revenue would be: 1000 x £50 = £50,000
Practice Question: A company sells 500 units of a product at a selling price of £100 per unit. What is the Sales Revenue generated by the company?
500 x £100 = £50,000
Gross Profit
Gross Profit is the profit a company makes after deducting the cost of goods sold from its sales revenue.
Gross Profit = Sales Revenue - Cost of Goods Sold
Example: If a company's Sales Revenue is £50,000 and its Cost of Goods Sold is £20,000, its Gross Profit would be: £50,000 - £20,000 = £30,000
Practice Question: A company's Sales Revenue is £100,000 and its Cost of Goods Sold is £60,000. What is the Gross Profit of the company?
£100,000 - £60,000 = £40,000
Net Profit
Net Profit is the profit a company makes after deducting all of its expenses from its gross profit.
Net Profit = Gross Profit - Expenses
Example: If a company's Gross Profit is £30,000 and its expenses are £10,000, its Net Profit would be: £30,000 - £10,000 = £20,000
Practice Question: A company's Gross Profit is £50,000 and its expenses are £30,000. What is the Net Profit of the company?
£50,000 - £30,000 = £20,000
Break-Even Level of Output
The Break-Even Level of Output is the level of production where a company's total revenue equals its total costs. At this level, the company neither makes a profit nor incurs a loss. The result is given in units, the number that needs to be sold. When dealing with break-even rounding, the number should always be rounded up, even if you would normally round down. For instance, if you have 154.4, it should be rounded up to 155 because it's not possible to create and sell 40% of something and rounding down could result in a small loss.
Break-Even = Fixed Costs ÷ (Selling Price per unit - Variable Cost per unit)
Brackets first.
Example: If a company has fixed costs of £50,000, a selling price per unit of £100, and a variable cost per unit of £70, its Break-Even Level of Output would be: £50,000 ÷ (£100 - £70) = 1000 units
Practice Question: A company has fixed costs of £80,000, a selling price per unit of £120, and a variable cost per unit of £80. What is the Break-Even Level of Output of the company?
£80,000 ÷ (£120 - £80) = 800 units
Profit and Loss
Profit and Loss is the statement that shows a company's revenue, expenses, and profit or loss for a specific period.
Profit or Loss = Total Revenue - Total Expenses
Example: If a company's Total Revenue is £100,000 and its Total Expenses are £80,000, its Profit or Loss would be: £100,000 - £80,000 = £20,000
Practice Question: A company's Total Revenue is £200,000 and its Total Expenses are £150,000. What is the Profit or Loss of the company?
£200,000 - £150,000 = £50,000
Margin of Safety
The Margin of Safety is the difference between the actual sales volume and the Break-Even Level of Output. It indicates how much sales can fall before the company starts making a loss.
Margin of Safety = Actual Sales - Break-Even Sales
Example: If a company's actual sales are 1500 units and its Break-Even Sales are 1000 units, its Margin of Safety would be: 1500 - 1000 = 500 units
3000 - 2000 = 1000 unitsTest yourself
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