In simple terms
A friendly intro before the formal notes — no formulas yet.
Costs and revenue: the food-truck basics
Costs are the money flowing OUT of a business to make and sell its product; revenue is the money flowing IN from selling it. Keep the two apart and profit is just the gap between them. Blur them and every later calculation goes wrong.
Picture running a taco truck at a weekend festival. The pitch fee to park the truck is a fixed cost — you pay it whether you sell one taco or a thousand. The tortilla, meat and salsa that go into each taco are variable costs — the more tacos you make, the more you spend on ingredients. Add the pitch fee to all the ingredient spending and you have your total cost. The cash in your till at the end of the day is your revenue: the price of a taco multiplied by the number you sold. Put revenue next to total cost and the difference is your profit for the day — that single comparison is what tells you whether the taco venture was actually worth doing.
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Separate the costs. Fixed costs stay the same whatever the output (pitch fee, rent, salaries); variable costs rise and fall with output (ingredients, raw materials).
- 2
Build total cost. Total variable cost = variable cost per unit × units made; total cost = fixed cost + total variable cost (TC = FC + VC).
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Build revenue. Revenue = price × quantity sold. If the business has more than one source of income, add each revenue stream together.
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Compare the two. Profit = total revenue − total cost. Revenue is money in; cost is money out; profit is only ever the gap between them.
Explore the concept
Use the live diagram and synced steps — play it or tap a step card to walk through.
2 more simulations for this topic — run them in the Simulations section below
Simulations
Every simulation here runs the real model — try the steps on a card, then check what you see against the notes.
2 simulations
- GeoGebraIB 3.3
Costs, revenue and break-even
A labelled break-even chart in £: fixed, variable and total cost lines, sales revenue, shaded loss and profit, and a Sales point you drag along the units axis.
Try this
- Find the flat Fixed Costs line: it sits at £9,000 whatever the output.
- Follow the Variable Costs line from the origin: it climbs £8 for every extra unit.
- Check that Total Costs is the two added together: it starts at £9,000 and runs parallel to Variable Costs.
- Drag the Sales point and compare Sales Revenue with Total Costs at that output.
Look for Fixed costs do not change with output, variable costs rise in step with it, and total cost is the sum of the two; revenue starts at zero and rises by the price per unit.
Stuart Price · GeoGebra · GeoGebra Terms of Service
- GeoGebraIB 3.3
Short-run cost curves
Tick boxes show or hide the ATC, AFC, MC and AVC curves; the q slider on the output axis sets output, and each current cost is read out at the top.
Try this
- Untick MC and AVC so that only Average Total Costs and Average Fixed Costs are left.
- Drag q from 30 to 60: Current AFC halves from 3.33, because the same fixed cost is shared by twice as many units.
- Compare Current ATC at a low output and at a high one.
Look for Total fixed cost stays the same, so fixed cost per unit falls as output rises; that is why average cost per unit drops when a business produces more.
tbki · GeoGebra · GeoGebra Terms of Service
Key formulas
Tap any symbol to reveal exactly what it means and its units.
Tap a symbol — great for exam definitions
Tap a symbol — great for exam definitions
Full topic notes
Formal explanation with the rigour you need for the exam.
Classifying costs by behaviour: fixed, variable and semi-variable
To judge profitability you must first break spending down. The most important split is by how a cost BEHAVES as output changes. Fixed costs stay constant whatever the level of production; variable costs move in step with it; semi-variable costs do a bit of both. This split matters because it lets a business forecast what its costs will be at different output levels and decide whether producing more is worthwhile.
Total cost (TC) = Fixed costs (FC) + Variable costs (VC), where VC = variable cost per unit × quantity produced
Fixed costs (FC): the costs of simply being open — rent, insurance, salaried staff, loan interest. They do not change with output, so they must be paid even if the business makes nothing. Spread over more units they fall per unit, but the TOTAL is flat.
Variable costs (VC): costs that rise and fall directly with output — raw materials, packaging, piece-rate labour, sales commission. At zero output they are zero; make one more unit and they rise by the variable cost of that unit.
Semi-variable costs: hybrids with a fixed base plus a variable top-up — an energy bill with a standing charge plus usage, or a salesperson on a basic salary plus commission. Split them into their two parts before using them in a calculation.
Total cost (TC): the sum of all fixed and all variable costs for the period — the single money-OUT figure you compare against revenue.
A second, separate split: direct costs and indirect costs (overheads)
Costs can also be classified by whether they can be TRACED to a specific product — and this is a completely separate question from whether they are fixed or variable. Direct costs attach to one product or cost centre; indirect costs (overheads) are general costs that support the whole business and cannot be pinned to a single item. The distinction drives pricing decisions and lets a firm judge whether an individual product line actually pays its way.
Direct costs: clearly traceable to one product or service — the steel, tyres and engine in one specific car, or the wage of a worker building only that model. Most (not all) direct costs happen to be variable.
Indirect costs (overheads): general costs that keep the whole business running but cannot be traced to one product — factory heating, the finance director's salary, company-wide advertising. Most (not all) overheads happen to be fixed.
Two independent classifications: a cost can be direct AND fixed (a machine leased just for one product line) or indirect AND variable (factory electricity that rises with total output). Never treat 'direct' and 'variable' as the same word.
When a case study asks you to classify costs, draw a quick three-column table: 'Cost item', 'Fixed or variable?', 'Direct or indirect?'. Filling BOTH classification columns separately stops you from collapsing the two ideas together and shows the examiner you know they are independent — the single most common way marks are dropped in this part of 3.3.
Average (unit) cost
Total cost tells you the whole bill; average cost tells you what one unit costs to make. It is total cost divided by the quantity produced. Average cost matters because it is the floor beneath any sensible selling price — sell below it for long and the business loses money on every unit. Because fixed costs are spread over more and more units as output rises, average cost typically falls as production grows.
Average cost (per unit) = Total cost ÷ Quantity produced
Revenue and revenue streams
Revenue is the money flowing INTO the business from its trading — the income earned from selling goods and services, also called sales revenue or turnover. Its core formula is simple: revenue = price × quantity SOLD. The word 'sold' matters: a firm earns revenue only on units customers actually buy, not on everything it produces. Many businesses also earn from more than one source — these separate sources are revenue streams, and total revenue adds them all together. A cinema, for example, earns from ticket sales, from food and drink, and from advertising, and its total revenue is the sum of the three.
Total revenue (TR) = Price per unit (P) × Quantity sold (Q); with several revenue streams, TR = sum of (price × quantity) for each stream
Price × quantity SOLD: revenue counts units bought by customers, not units made. Produce 100 but sell 90 and revenue is based on 90.
Multiple revenue streams: a single business can have several income sources — a gym earns from memberships, personal training and merchandise; a newspaper from copy sales and advertising.
Add the streams: total revenue is every stream's price × quantity added together, which is why a business can grow revenue by opening a new stream as well as by selling more of the existing one.
Revenue is money IN, before costs: it is never the same as profit — the costs still have to be taken off.
Cost vs revenue: the distinction that decides profit
Everything in this topic exists to support one comparison. Cost is money flowing OUT of the business to make and sell its product; revenue is money flowing IN from selling it; and profit is nothing more than the gap between them: profit = total revenue − total cost. Keeping the two figures rigorously apart is what makes the profit calculation meaningful. The danger is treating high revenue as if it were success in itself. A firm can post enormous revenue and still make a loss if its costs are higher still — turnover is vanity, profit is sanity. This is also why the produced-versus-sold distinction matters: cost is driven by what the business PRODUCES, revenue by what it SELLS, and only by lining the correct figures up on each side do you get a profit number you can trust.
Cost = money out; revenue = money in; profit = revenue − cost. Three distinct ideas, never interchangeable.
Big revenue is not the same as profit. If total cost exceeds total revenue the business makes a LOSS, however large the sales figure looks.
Cost tracks units produced; revenue tracks units sold. Match the right quantity to each side before comparing.
Why it matters for decisions: pricing, accepting orders, dropping a product and forecasting all depend on comparing the cost of an action with the revenue it brings — get the two mixed up and the decision is wrong.
Common mistakes examiners penalise
Confusing fixed and variable costs — rent, insurance and salaried pay are fixed (unchanged by output); raw materials, packaging and piece-rate pay are variable (rise with output). Mislabelling one wrecks the whole total-cost calculation.
Forgetting to scale variable cost by output — a per-unit variable figure ($4 per unit) must be multiplied by quantity before it is added to fixed cost. Adding the per-unit figure straight to fixed cost is a frequent, heavily penalised slip.
Getting TC = FC + VC wrong — total cost ADDS fixed and variable cost; it never subtracts them and is not the same as average cost. Quote the formula, then substitute.
Treating 'direct' and 'variable' as the same thing — direct/indirect (traceability) and fixed/variable (behaviour) are two separate classifications; a cost can be direct and fixed, or indirect and variable.
Mixing up units produced and units sold — total cost uses units PRODUCED; revenue = price × units SOLD. Using the wrong quantity on either side corrupts the profit figure.
Confusing revenue with profit — revenue is money in before costs; profit is what remains after total cost is deducted. High revenue with higher costs is a loss.
Dropping units and currency — a naked number like '32000' with no '$' loses the accuracy mark. Always attach the currency and, where the case gives one, the timeframe (per month, per year).
Ignoring extra revenue streams — if a business has more than one source of income, total revenue is the SUM of all of them; counting only the main product understates it.
Model answer — marked the way our engine marks it
Because 3.3 is quantitative, the model answer is a CALCULATION, and our marking engine awards it using the IB Business Management method-and-accuracy conventions. A method mark (M) is given for the correct formula or approach — showing you know TC = FC + VC or revenue = price × quantity — even before any number is produced. An accuracy mark (A) is given for the correct final figure carried to the right units and currency. Crucially, the engine applies the own-figure-rule (follow-through): if you use the right method but carry an earlier wrong number forward, you still earn the method marks and any accuracy mark that is correct GIVEN your earlier figure. So the way to protect marks is always to show the formula and every step, not just the final answer. Watch how the marks below attach to method, to accurate figures with units, and to correctly followed-through arithmetic.
Where this leads
These two figures — cost and revenue — are the raw material for almost everything else in the finance unit. Total cost and total revenue feed straight into break-even analysis, where you find the output at which revenue first covers cost. The fixed-versus-variable split reappears in contribution and in make-or-buy and special-order decisions. Average cost underpins cost-plus pricing, and the profit figure you build here is the starting point for the profit-and-loss (income) statement and profitability ratios. Master the habit built in this lesson — separate cost from revenue, match the right quantity to each, quote the formula, substitute, and carry the units through — and you have the template that earns marks across every quantitative question in Business Management.
Worked examples
See the formulas applied — reveal one step at a time, like the exam.
A furniture maker, 'Oak & Anvil', has these monthly costs: workshop rent $2,000; full-time administrator's salary $1,800; wood and materials $50 per chair; piece-rate labour $30 per chair. In March it produced 100 chairs. Calculate the total cost for March. [4]
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Step 1 — Total fixed cost (FC). Rent and the administrator's salary do not change with the number of chairs, so both are fixed. FC = 1,800 =
Using Oak & Anvil's March figures — total cost $11,800 for 100 chairs - calculate the average cost per chair. Then state what happens to average cost if output rises to 200 chairs, given fixed costs stay at $3,800 and variable cost stays $80 per chair. [4]
- 1
Step 1 — Average cost at 100 chairs. Average cost = total cost ÷ quantity = 118 per chair.**
Continuing with Oak & Anvil: it sells each chair for $200. In March it produced 100 chairs but sold only 90. It also earned $1,500 that month from a separate stream — repairing customers' old furniture. Using the total cost of $11,800 from earlier, calculate total revenue and the resulting profit or loss for March. [6]
- 1
Step 1 — Revenue from chair sales (price × quantity SOLD). Revenue only counts the 90 chairs actually sold, not the 100 produced. Chair revenue = 18,000.
A firm has fixed costs of $12,000 per month, variable costs of $4 per unit, and sells 5,000 units at $10 each. Calculate its total costs, total revenue and profit for the month. [6]
- 1
Model answer.
How it all connects
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Tap a linked idea to see how it connects back to the main topic — that connection is what examiners reward.
Glossary
Key terms for this topic — skim now; the Check step will test them.
- Fixed costs (FC)
Costs that do NOT change with the level of output and must be paid even at zero production. Examples: rent, insurance, salaried staff, loan interest. On a per-unit basis they fall as output rises, but the total stays constant.
- Variable costs (VC)
Costs that change in direct proportion to output — the more the business produces, the higher they are, and at zero output they are zero. Examples: raw materials, packaging, piece-rate labour, commission.
- Semi-variable costs
Costs with BOTH a fixed and a variable element. Example: an energy or phone bill with a fixed standing charge plus a usage charge, or a salesperson on a basic salary plus commission. Neither wholly fixed nor wholly variable.
- Total cost (TC)
The whole cost of producing a given output for a period: TC = FC + VC, where VC = variable cost per unit × quantity produced. It is the money-OUT figure you compare against revenue to find profit.
- Average cost (unit cost)
The cost of producing one unit: average cost = total cost ÷ quantity produced. Because fixed cost is spread over more units, average cost usually falls as output rises.
- Direct costs
Costs that can be clearly traced to a specific product, service or cost centre. Example: the wood in one specific table, or the wage of a worker building only that product line.
- Indirect costs (overheads)
Costs that cannot be traced to a single product — the general running costs that support the whole business. Examples: the factory supervisor's salary, head-office electricity, company-wide marketing.
- Revenue
The income a business earns from its normal trading activities, chiefly selling goods and services. Also called sales revenue or turnover. It is the money-IN figure, before any costs are taken off.
- Revenue = price × quantity sold
Total revenue is the selling price per unit multiplied by the number of units SOLD (not merely produced). TR = P × Q. Where prices differ across products, revenue is the sum of each price × quantity.
- Revenue stream
A distinct source of income. A single business often has several: a gym earns from membership fees, personal-training sessions and merchandise; a newspaper from copy sales and advertising. Total revenue adds every stream together.
- Cost vs revenue (why it matters)
Cost is money leaving the business to make and sell the product; revenue is money coming in from selling it. Profit = total revenue − total cost. High revenue with even higher costs is a LOSS, which is why the two must never be confused.
Name it
Read the meaning, then pick which of this lesson’s terms it describes. Miss one and you see what your choice really means.
Costs that cannot be traced to a single product — the general running costs that support the whole business. Examples: the factory supervisor's salary, head-office electricity, company-wide marketing.
Quick check
Write your answer first, then compare it with the model one — the gap is what you would have lost.
Teach it back
If you can explain it simply, you own it — gaps here are marks you’d lose.
Teach it back
Explain this topic as if teaching a friend. We name the gaps an examiner would still dock.
Revision flashcards
Guess first, then flip — retrieval beats re-reading.
Key takeaways
Review these before you close the topic — retrieval beats re-reading.
Fixed costs (FC): the costs of simply being open — rent, insurance, salaried staff, loan interest. They do not change with output, so they must be paid even if the business makes nothing. Spread over more units they fall per unit, but the TOTAL is flat.
Variable costs (VC): costs that rise and fall directly with output — raw materials, packaging, piece-rate labour, sales commission. At zero output they are zero; make one more unit and they rise by the variable cost of that unit.
Semi-variable costs: hybrids with a fixed base plus a variable top-up — an energy bill with a standing charge plus usage, or a salesperson on a basic salary plus commission. Split them into their two parts before using them in a calculation.
Total cost (TC): the sum of all fixed and all variable costs for the period — the single money-OUT figure you compare against revenue.
Practice — then mark it
The whole point: a real Cambridge question, marked mark-by-mark.
Get a Paper 2 calculation marked: work out total cost, total revenue and profit, showing method and accuracy the way the engine awards the marks
Get a Paper 2 calculation marked: work out total cost, total revenue and profit, showing method and accuracy the way the engine awards the marks
Extra simulations & links
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Frequently asked
Checkpoint
One marked question is worth ten re-reads — close the loop before you move on.
Reading it isn’t knowing it — prove it.
Before you move on: do Get a Paper 2 calculation marked: work out total cost, total revenue and profit, showing method and accuracy the way the engine awards the marks on paper, snap a photo, and get examiner-style feedback on exactly where you win and lose marks.
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