Scribd
Upload
159 views

LESSON 16 - Cost, Revenue and Profit

1. There are two types of costs for businesses: fixed costs which do not vary with production like rent, and variable costs which change with output like materials. Total costs are the sum of fixed and variable costs. 2. Revenue is the money earned from sales, calculated as price per item times items sold. Profit is total revenue minus total costs. 3. The break even point is where total revenue and total costs intersect, meaning the business covers costs but does not make a profit. Operating above the break even point results in profits, while below results in losses.

Uploaded by

farah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
159 views

LESSON 16 - Cost, Revenue and Profit

1. There are two types of costs for businesses: fixed costs which do not vary with production like rent, and variable costs which change with output like materials. Total costs are the sum of fixed and variable costs. 2. Revenue is the money earned from sales, calculated as price per item times items sold. Profit is total revenue minus total costs. 3. The break even point is where total revenue and total costs intersect, meaning the business covers costs but does not make a profit. Operating above the break even point results in profits, while below results in losses.

Uploaded by

farah
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as DOC, PDF, TXT or read online on Scribd
You are on page 1/ 5

LESSON 16- Cost, Revenue and Profit

Main Lecture:

1. Introduction

Just as consumers make decisions about what goods and services to buy,
entrepreneurs make decisions about what goods and services to produce and
how to do this. Whatever method of organizing production an entrepreneur
uses, the aim is to reduce costs to their lowest possible level so as to try and
make as much profit as possible.

2. Types of costs

There are two types of costs. The first one is known as fixed costs. These are
the costs that do not vary with the amount of production. These fixed costs
usually include weekly or monthly payments to be made by business such as
paying fixed taxes, or rent of the building/machinery etc.

The graph of fixed cost would look like this:-


The other type is the variable cost. Variable costs are those costs which
change with the level of output produce. Examples would include the cost of
raw materials, as well as the wages of workers.

The graph of variable costs is as shown below.

Please note that the graph is passing through origin.

If we combine Fixed costs and variable costs, we get the total cost of
production. Therefore TC = FC + VC

The following graph shows the relationship of total cost with both fixed
costs and variable costs.
After that we've got average costs. The formula of average cost is :-

Average cost (AC) = (Total cost / Number of units produced)

For example if the total cost of producing 20 teddy bears is Rs.4000, then
the average cost would be (4000/20) = Rs.200

3. Revenue and Profit

The total revenue is the amount of money earned by the business by the sale
of their goods. Total sales revenue is also known as turnover. Total revenue
can be calculated as:-

Total revenue (TR) = (Price per item) x (Number of items sold)

Just like average cost, we also have average revenue. The formula is also
similar:-

Average revenue (AR) = (Total Revenue / (Numbers of items sold)

Then we also have profits. To calculate the profit or loss to the business,
total cost of the business needs to be subtracted from total revenue. If the
business is successful, its total revenue will exceed its total costs and it will
make a profit.

Profit (or loss) = TR - TC


4. Break even point

Here's a graph showing both Total Revenue and Total Costs

Where the curves of total revenue and total cost intersect, no profit or loss is
made. This level or output and sales is known as the break-even point of
production. This means that if the business manages to sell all the items it
produces at this point, it will just cover the costs and be able to prevent
bankruptcy. As you can see from the graph above that operating above break
even point results in Profit (as total revenue outweighs total cost), while
operating below it results in a loss (as total cost outweighs total revenue.)

You might also like