Every aim from 1.3.1 needs real numbers behind it — how much money is coming in, what it actually costs to trade, and exactly how many sales are needed before a business stops losing money.
Whatever aim a business has from 1.3.1 — survival, profit, growth — it can only be judged against real figures. This chapter covers seven specific calculations Edexcel expects you to understand and apply: revenue, fixed and variable costs, total costs, profit and loss, interest, break-even level of output, and margin of safety.
Unlike some calculations elsewhere in this course, you will not be given the break-even formula in the exam — you need to know and apply it yourself. We'll follow one small business throughout this chapter so every calculation builds on the last, rather than sitting in isolation.
Marlowe's Sandwich Bar sells sandwiches for £4 each. The variable cost of making each sandwich is £1.50, and the business has fixed costs of £2,000 per month. It currently sells 1,000 sandwiches a month.
Revenue is the total income a business receives from selling its goods or services, before any costs are taken away.
Applying it: Marlowe's Sandwich Bar sells 1,000 sandwiches at £4 each. Revenue = £4 × 1,000 = £4,000 per month.
Costs that stay the same regardless of how much is produced or sold — rent, insurance, and salaried staff wages are typical examples.
Costs that rise directly with the amount produced — raw materials and packaging are typical examples, since making more units means buying more of both.
Applying it: Marlowe's Sandwich Bar has fixed costs of £2,000 per month. Its variable cost per sandwich is £1.50, and it sells 1,000 sandwiches. Total variable costs = £1.50 × 1,000 = £1,500. Total costs = £2,000 + £1,500 = £3,500 per month.
A business makes a profit when revenue is greater than total costs, and a loss when total costs are greater than revenue.
Applying it: Marlowe's Sandwich Bar's revenue is £4,000 and its total costs are £3,500. Profit = £4,000 − £3,500 = £500 profit for the month.
Interest is the cost of borrowing money, usually charged by a lender as a percentage of the amount borrowed each year — directly relevant to the sources of finance you'll meet properly in 1.3.4.
Applying it: Marlowe's Sandwich Bar takes out a £5,000 loan at an annual interest rate of 8%. Interest = £5,000 × 0.08 = £400 per year.
The break-even level of output is the number of units a business must sell for its revenue to exactly equal its total costs — no profit, but no loss either. Unlike some other calculations in this course, Edexcel expects you to know and apply this formula yourself.
The figure in the brackets — selling price minus variable cost per unit — is called the contribution per unit: how much each sale actually contributes towards covering fixed costs, once its own variable cost has been paid for.
Applying it: Marlowe's Sandwich Bar's contribution per unit = £4 − £1.50 = £2.50. Break-even output = £2,000 ÷ £2.50 = 800 sandwiches per month.
The margin of safety is the amount by which actual or planned output exceeds the break-even level — how far sales could fall before the business starts making a loss.
Applying it: Marlowe's Sandwich Bar sells 1,000 sandwiches, and its break-even output is 800. Margin of safety = 1,000 − 800 = 200 sandwiches.
Enter figures to see revenue, total costs, profit, break-even output and margin of safety calculated live.
The total revenue and total cost lines cross at the break-even point, 800 sandwiches. Marlowe's Sandwich Bar's planned output of 1,000 sits comfortably beyond that, giving a margin of safety of 200 sandwiches.
A change to price or costs shifts the break-even point itself. If Marlowe's Sandwich Bar raised its price to £5 without any other change, each sandwich would contribute more towards fixed costs (£3.50 instead of £2.50), so the break-even output would fall to 2,000 ÷ 3.50 ≈ 572 sandwiches — fewer sales needed to cover costs. If fixed costs rose instead — a rent increase, for example — the break-even output would rise, since more sandwiches would be needed just to cover the higher fixed costs before any profit begins.
Standalone questions below are typical of Section A — no case study needed. The 6 and 9-mark questions are built around a Source Booklet–style case study, matching how Section B and C actually work in the real exam.
Which one of the following is an example of a fixed cost?
A. Raw materials
B. Packaging
C. Rent
D. Delivery fuel per order
Answer: C.
A business sells 500 units at £6 each. Calculate the business's total revenue.
Answer: £6 × 500 = £3,000. Full marks are typically awarded for the correct final answer, though showing working is good practice.
Explain one difference between fixed costs and variable costs.
Structure guide: 1 mark identifying the difference, plus 2 further marks developing it — eg "Fixed costs do not change with output (1), such as rent, which stays the same however much is produced (1), whereas variable costs like raw materials rise directly as more is produced (1)."
Using the information above, calculate Marlowe's Sandwich Bar's break-even level of output. Show your working.
Answer: contribution per unit = £4 − £1.50 = £2.50. Break-even output = £2,000 ÷ £2.50 = 800 sandwiches.
Analyse the impact on Marlowe's Sandwich Bar of its current margin of safety of 200 sandwiches.
Structure guide: application (AO2) and analysis (AO3a) together — eg identify that current sales of 1,000 sit 200 sandwiches above the break-even point (AO2), then analyse how this gives Marlowe's Sandwich Bar a reasonable buffer against a fall in demand, but that a larger unexpected drop — for example if a nearby office closed and reduced footfall — could still push the business towards a loss despite this current buffer (AO3a).
Marlowe's Sandwich Bar is considering two options to increase its margin of safety: raising its selling price to £4.50, or reducing its fixed costs by moving to cheaper premises. Justify which option Marlowe's Sandwich Bar should choose.
Structure guide: apply knowledge to the business's specific figures (AO2), analyse points on both sides (AO3a) — raising the price increases contribution per unit and lowers break-even output immediately, but risks losing price-sensitive customers, while moving premises reduces fixed costs directly but could mean losing a convenient location — then reach a clear, justified choice (AO3b).