Revenue, cost and profit

Total cost

The total cost is the amount of money spent by a firm on producing a given level of output. Total costs are made up of fixed costs (FC) and variable costs (VC).

Losses can be reduced or turned into profit by:

- cutting costs, for example, by letting staff go and asking those who remain to accept lower wages - increasing revenue , for example by cutting prices and selling more items - if demand is elastic

Profit is the reward for risk-taking. A business can use profit to either:

- reward owners - invest in growth - save for the future, in case there is a downturn in revenue

Trading does not guarantee profit.

A loss is made when the revenue from sales is not enough to cover all the costs of production.

Costs

Costs are the expenses involved in making a product.

Another way of classifying costs is to distinguish between direct costs and indirect costs.

Direct costs, such as raw materials, can be linked to a product whereas indirect costs, such as rent, cannot be linked directly to a product.

Fixed costs

Other costs, called fixed costs, stay the same even if more is produced. Office rent is an example of a fixed cost which remains the same each month even if output rises.

Profit

Profit is the surplus left from revenue after paying all costs. Profit is found by deducting total costs from revenue. In short: profit = total revenue - total costs.

Other words for revenue

Revenue is sometimes called sales, sales revenue, total revenue or turnover.

Revenue

Revenue is the income earned by a business over a period of time, eg one month. The amount of revenue earned depends on two things - the number of items sold and their selling price. In short, revenue = price x quantity.

Variable costs

Some costs, called variable costs, change with the amount produced. For example, the cost of raw materials rises as more output is made.