revenue and cost

Revenue and calculation

Total amount of money generated from selling the product or services

Revenue= selling price x quantity

Costs and equations

Fixed cost : costs that do not vary in relation to output

Variable costs : these are costs that vary in relation to output

Total costs : total sum of fixed and variable costs

Total cost + fixed cost + total variable costs

Profit

difference between the income of the business and its total cost

Profit= total revenue - total costs

Why is profit important

Profit is reward for the entrepreneur

Profit is a motivator for owner and employees

Profit is a measure of success

Profit is a source of finance

Profit can attract stakeholders such as customers shareholders and employees

break even

The point at which both revenue and total costs are the same ( business is not making profit / loss)

Break even = fixed costs \ contribution per unit

The lower the better

Advantage of break even analysis

Gives entrepreneur idea on how long it will take before the startup up reaches profitability

Can be used to aid application for investment

Margins of safety calculation shows how much a sales forecast can prove over

Calculations are quick and easy good for estimates

Disadvantage

Unrealistic assumption that products are not sold at same price at different levels of production

Sales are unlikely to be the same as output there may be some build up of stocks or wasted output

Most businesses sell more than one product so break even for business becomes harder to calculate

Break even should be seen as planning aid rather than a decision making

Contribution per unit (CPU)

CPU: portion of sales revenue that is not consumed by variable costs and so contributes to the coverage of fixed cost and then profit

CPU= selling price - variable cost per unit

OR

CPU= total contribution/ number of unit

The higher the better

Total contribution

Total contribution : difference between total sales and total variable costs

Total contribution =total revenue - total variable costs

OR

Total contribution = CPU x units

Total variable costs = variable cost per unit x units

The higher the better

Margin of safety

Difference between actual sales and the level of break even output

Margin of safety+ actual output - break even output