Profit, Average Unit Cost & Interest
Business: Edexcel IGCSE, topic 3.3.2
Profit, Average Unit Cost and Interest
Profit is the amount of money that the business makes, when taking into account costs. It is in effect, a surplus.
Profit
- Profit = total revenue – total costs.
- This is a simple and yet very important formula.
- If revenue is greater than costs, a company will make a profit.
- If costs are greater than revenue, a company will make a loss.
Average unit cost
- Average unit cost = total cost ÷ output (total number of units produced).
- This gives a business an idea of what price they need to charge.
- In order to make a profit on each item, they need to charge a price that is more than the average unit cost.
Interest
- When you borrow money, you usually pay back more than you borrowed. This extra amount is known as the interest on the loan and it is the percentage of the loan that is charged as extra.
- Interest = interest rate x the size of the loan.
- So, if a business borrows £200 at an interest rate of 5%. Then the interest they pay on the loan each year is 200 x 0.05 = £10.
Test yourself on Profit, Average Unit Cost & Interest
What is the equation for profit?
If a hot dog van has a total cost of £1500 and produces an output of 750 hotdogs, what is the average unit cost of 1 hot dog?
If a business borrows a loan of £9,000 at an interest rate of 2%, how much interest will they pay on the loan each year?