Costs and Revenues
1.3 Costs and Revenues
To evaluate financial performance, businesses must understand the relationship between costs and revenues.
Revenue
Revenue refers to the income a business receives from selling goods or services.
Revenue = Price × Quantity Sold
For example, if a company sells 1,000 units of a product at $10 each, the total revenue will be $10,000. Businesses aim to maximize revenue by increasing sales volume, improving product value, or expanding into new markets.
Fixed Costs
Remain constant regardless of production level. Examples: rent, salaries, insurance. Even if production is zero, fixed costs must still be paid.
Variable Costs
Change directly with production levels. Examples: raw materials, packaging, direct labour. If production increases, variable costs also increase.
Total Cost = Fixed Cost + Variable Cost
Average Cost = Total Cost ÷ Quantity Produced
Profit = Total Revenue − Total Costs
Gross Profit = Revenue − Cost of Goods Sold
Net Profit = Gross Profit − Operating Expenses
Understanding cost structures helps managers set prices, control expenses, and improve profitability. Profitability is essential for long-term business sustainability.