Unit 3.3: Costs and Revenues - IB Business Management

Costs and Revenues

The video explains how businesses classify costs, calculate revenue and profit, and benefit from having multiple revenue sources.

Types of costs

• Fixed costs stay the same regardless of how much a business produces or sells. Examples include rent, permanent staff salaries, and insurance. These costs still have to be paid when sales are low, which can put pressure on cash flow.
  • Fixed costs may change over time, but not because output changes. For example, a bakery’s rent does not rise just because it sells more cakes that month.
• Variable costs change with production levels: they rise when output increases and fall when output decreases. Examples include raw materials, production-worker wages, and utilities that vary with usage.
• Direct costs can be traced to a particular product or service, such as the ingredients and labour used to make a cake.
• Indirect costs, often called overheads, cannot be tied directly to one product. Examples include rent, administrative salaries, and general electricity or air-conditioning costs. They are often fixed, though indirect costs can also be variable.

Key cost formulas

• Total variable cost = variable cost per unit × quantity produced
• Total cost = fixed cost + variable cost
• Total cost = direct costs + indirect costs

The video emphasizes the fixed-cost-plus-variable-cost formula as the one more commonly used in the course.

Revenue, revenue streams, and profit

• Revenue is the money earned from selling goods and services, before costs are deducted.
• Revenue = price × quantity
• Businesses can earn revenue through different revenue streams. Disney is used as an example, with income from theme-park tickets, food and beverages, and Disney+.
• Diversifying revenue streams can:
  • Increase revenue and potentially profit.
  • Help a business reach different market segments.
  • Reduce reliance on a single product or source of income. For instance, during COVID-related theme-park closures, Disney+ could continue generating revenue.
• Profit is what remains after costs are deducted from revenue:
  • Profit = total revenue − total cost

Revenue and profit are not the same: revenue is earned before expenses, while profit is calculated after expenses.

Study and exam advice

• Learn the formulas and practise applying them in quantitative questions.
• Practise calculating profitability and rearranging the profit equation algebraically.
• Work through case studies and develop application skills, since school assessments and the final IB exam are case-study based.
• The video refers to steps in a study routine but does not list them in the subtitles; it advises paying particular attention to steps two and three.
• The Diplomaly website is mentioned as a source of formula sheets and quantitative-skills resources.

Speakers and sources

• Speaker: A narrator/presenter from Diplomaly.
• Example: Disney, used to illustrate diversified revenue streams.
• Resources: The Diplomaly website, including its formula sheet and quantitative-skills videos.