IGCSE Economics 0455: Revenue, Cost and a Monthly Loss for a Bakery

Marlow Bakes is a small bakery that sells artisan bread loaves at a fixed price of $4 each. Its fixed costs (oven lease and shop rent) are $1200 per month, and each loaf costs an additional $2.50 of flour, yeast and other ingredients (its variable cost per loaf). In one particular month, the bakery sells 400 loaves.

(a) Calculate the bakery's total revenue for the month, and its average revenue per loaf sold. [2]

(b) Calculate the bakery's total cost of making 400 loaves this month. [2]

(d) Explain one way Marlow Bakes could try to turn this result into a profit next month, without changing the number of loaves it sells. [2]

Part (a): Total revenue and average revenue

Total revenue is the price per loaf multiplied by the quantity sold:

$\text{Total revenue} = \text{Price} \times \text{Quantity} = 4 \times 400 = 1600$

So total revenue for the month is $1600.

Average revenue is total revenue divided by the quantity sold:

$\text{Average revenue} = \frac{1600}{400} = 4$

Average revenue is $4 per loaf, as expected, since every loaf is sold at the same $4 price, the average revenue per unit is simply that price.

Part (b): Total cost

The variable cost of making 400 loaves, at $2.50 each, is:

$\text{Variable cost} = 2.50 \times 400 = 1000$

Adding this to the fixed cost of $1200:

$\text{Total cost} = \text{Fixed cost} + \text{Variable cost} = 1200 + 1000 = 2200$

So the total cost of making 400 loaves this month is $2200.

Part (c): Profit or loss

Profit is total revenue minus total cost:

$\text{Profit} = \text{Total revenue} - \text{Total cost} = 1600 - 2200 = -600$

The result is negative, meaning total cost ($2200) was greater than total revenue ($1600). Marlow Bakes therefore made a loss of $600 this month, not a profit.

Part (d): Turning the loss into a profit

Without changing the number of loaves sold (400), Marlow Bakes could raise its price above $4 per loaf, since it currently sells every loaf at the same price, a higher price raises both total revenue and average revenue directly, without needing extra customers. Alternatively, it could try to reduce its costs: switching to a cheaper flour or yeast supplier would lower the $2.50 variable cost per loaf, or renegotiating a cheaper oven lease or shop rent would lower the $1200 fixed cost. Any of these changes would narrow the gap between revenue and cost, turning the $600 loss into a smaller loss or a profit.

Final answers

(a) Total revenue $=$ $1600; average revenue $=$ $4 per loaf.
(b) Total cost $=$ $2200.
(c) Loss of $600 ( $1600 - 2200 = -600$ ).
(d) Raising the price per loaf, or cutting variable/fixed costs, would improve the result without selling more loaves.