OCR A-level Business (H436) · Costs, revenue, profit and loss
Mini-Lesson
Costs, revenue, profit and loss
This mini-lesson covers the core of H436 Unit 5 — Finance: fixed, variable and total costs, revenue, contribution, break-even output and revenue, the margin of safety and profit — every one of them calculated in full — plus the break-even chart, its limitations, and the income statement.
Work through each screen, answer the questions as you go (some are written, many are calculations) and collect ⭐ stars. Watch for the Calculate and Exam skill flags. Press Start when you're ready.
Unit 5 · Costs
Fixed, variable and total costs
Fixed costs do not change with output in the short run: rent, salaries, insurance, loan interest. They are not zero at zero output.
Variable costs change directly with output: raw materials, packaging, piece-rate wages, energy used in production.
Semi-variable costs have both elements (a phone line rental plus call charges).
total costs = fixed costs + (variable cost per unit × output)
total revenue = selling price × quantity sold
profit = total revenue − total costs
Watch the trap: fixed cost per unit falls as output rises (it is spread), even though total fixed cost is unchanged. That is the whole engine behind economies of scale.
Unit 5 · Contribution
Contribution — the key idea
contribution per unit = selling price − variable cost per unittotal contribution = contribution per unit × units sold
Contribution is what each unit sold contributes towards paying the fixed costs. Once fixed costs are covered, every further unit's contribution becomes profit.
profit = total contribution − fixed costs
Worked example
Price £30, variable cost £18 → contribution = 30 − 18 = £12 per unit
Sell 11,500 units → total contribution = 12 × 11,500 = £138,000
Left of the break-even point the firm makes a loss; right of it, every extra unit adds its contribution to profit.Calculate
Your turn — break-even output
2Marlow Ltd has fixed costs of £96,000 and a contribution of £12 per lamp. Calculate the break-even output.
units
Hint: break-even = fixed costs ÷ contribution per unit = 96,000 ÷ 12.
Calculate
Your turn — break-even revenue
3Each lamp sells for £30 and break-even output is 8,000 lamps. Calculate the break-even revenue.
£
Hint: 8,000 × 30.
Unit 5 · Margin of safety
Margin of safety and profit
margin of safety = actual output − break-even outputhow far sales can fall before the firm makes a loss
profit = (contribution per unit × units sold) − fixed costs
A large margin of safety means the business can absorb a fall in demand. A small one means it is dangerously close to loss — a strong argument against a business with very high fixed costs entering a volatile market.
Calculate
Your turn — margin of safety
4Marlow Ltd actually sells 11,500 lamps and breaks even at 8,000. Calculate its margin of safety.
units
Hint: margin of safety = actual output − break-even output.
Calculate
Your turn — profit
5With contribution of £12 per lamp, sales of 11,500 lamps and fixed costs of £96,000, calculate Marlow's profit.
£
Hint: total contribution = 12 × 11,500 = £138,000, then subtract £96,000 of fixed costs.
Quick check
Quick check
?Marlow's landlord raises the rent by £12,000 a year. Everything else is unchanged. The new break-even output is:
Unit 5 · Limitations
Using — and doubting — break-even analysis
+ Quick, cheap, visual; supports a loan application; lets you run "what if" scenarios on price, cost and fixed cost changes.
− It assumes everything sold is produced and price is constant at every output (no discounts). It assumes costs are neatly fixed or linear-variable — they are not (bulk discounts, overtime rates). It is only as good as the forecast behind it, and it is static in a changing market.
Exam edge: the strongest evaluation is that break-even ignores demand altogether. It tells you what you must sell — not whether anyone will buy it.
Sort it
Fixed, variable or neither?
Tap a cost, then tap the category it belongs to.
🏛️ Fixed cost
📦 Variable cost
🔀 Semi-variable
Unit 5 · Statements
From contribution to the profit and loss
The income statement (profit and loss account) shows performance over a period:
Improving profit: raise price (if demand is inelastic), cut variable costs (cheaper supplier — watch quality), cut fixed costs (relocate, delayer), or raise volume. Each has a strategic cost.
Match it
Match the finance term to its formula
Tap a card on the left, then its partner on the right.
Term
Formula
Quick check
Quick check
?A firm's contribution per unit is positive but it still makes a loss. This means:
Unit 5 · Contribution
Special order decisions
Contribution analysis answers the classic exam question: should we accept a one-off order below our normal price?
If the business has spare capacity, the fixed costs are already being paid. So the order is worth accepting whenever it makes a positive contribution — that is, whenever the price offered exceeds the variable cost per unit.
Worked example
A retailer offers to buy 2,000 lamps at £22 each. Variable cost is £18.
Contribution = 22 − 18 = £4 per lamp → total contribution = 4 × 2,000 = £8,000 extra profit.
But evaluate: is there really spare capacity? Will existing customers demand the same discount? Will the low price damage the brand? A positive contribution makes the order financially attractive — it does not make it strategically right.
Calculate
Your turn — accept the order?
6A retailer offers to buy 2,000 lamps at £22 each. Variable cost is £18 and there is spare capacity. Calculate the extra contribution the order would generate.
£
Hint: contribution per unit = 22 − 18 = £4. Then × 2,000 units.
Quick check
Quick check
?Marlow has spare capacity and is offered £16 per lamp (variable cost £18). It should:
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