Cost, revenue and profit

revenue/turnover/total sales definition and formula

Is the amount of money that is made through the selling of goods and services.

total revenue = Quantity of units sold x selling price per unit

Fixed costs definition m ,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,,

Costs stay the same regardless of output e.g. rent and managers’ salaries e.g. rent/mortgage, salaries, business rates

Variable costs definition

Costs that change depending on to the number of items produced. (They vary in direct proportion to the output).

Semi-variable costs

Are costs that have elements of fixed costs and variable cost.

total costs definition and formula

Fixed costs plus total variable costs.

Total costs = total fixed costs + total variable costs

Profit definition and formula

The amount remaining after total costs are deduced from total revenue

Profit = total revenue - total costs

Direct costs definition

Arise specifically from the production of a product or the provision of a service

Indirect costs definition

Are costs that are not directly related to production. These costs are related to the wider business and are necessary to keep the business running.

Breakeven definition and formula

The point at which total revenue equals total costs, resulting in neither profit nor loss. Breakeven = total costs = total revenue

Breakeven point definition and formula

The amount of sales the business needs to achieve before it can start being profitable.

Breakeven output = Total fixed costs / contribution per unit

Contribution definition and formula

The amount that each unit produced ‘contributes’ towards the fixed cost of the business

contribution per unit = selling price - Variable costs

Margin of safety definition and formula

Is how much actual output level is above the breakeven output.

margin of safety = actual output level - breakeven level of output

Breakeven analysis definition

Can be used to show the business what will happen to breakeven and profit in a range of scenarios

Uses of breakeven

Setting targets for minimum sales, work out when you’ll stop making a loss, show to investors, uses in business plan, assess the impact of changing variables.

Limitations of breakeven

Assumes everything made is sold, doesn't take any discounts into consideration, calculation are only as accurate as the data they are based on, hard to work out if the company has multiple products