revenue, costs and profit

• Revenue


  is the money a business makes from sales; in other words, it is the value of the sales. (It is also referred to as turnover.)
• Total Revenue = Quantity of Units Sold x Selling Price
• Profit = Total Revenue – Total Costs
• Fixed costs 


  are costs that do not vary with output. No matter how much is made or how little is sold, fixed costs still have to be paid. e.g. rent
• variable costs 


  vary in direct proportion to output – as output increases, variable costs increase; as output falls, variable costs fall.
• It is often assumed that there is a constant relationship between output and variable costs, but in most cases this constant relationship does not hold true. Businesses more often benefit from purchasing economies of scale, so as output increases, variable costs per unit produced start to fall.
• Direct Costs

  Direct costs are costs that arise specifically from the production of a product or the provision of a service.
• Examples of direct costs include:

  • materials or components
  • direct labour
  • some expenses, e.g. copyright payments on a published book or licence fees for use of patents.
• The true profitability of a product, factory, outlet, etc. can only be judged if you subtract both direct costs and overheads from the revenue. Therefore, overheads are costs not directly related to production.