IF Total Revenueismore thanTotal Coststhe firm makes aPROFIT
Total Revenue > Total costs = PROFIT
IF Total Revenueis less thanTotal Coststhe firms makesaLOSS
Total Revenue < Total Costs = LOSS
IF Total Revenueis the same asTotal Coststhe firmBREAK EVEN
TOTAL REVENUE = PRICE PER UNIT (Product) X QUANTITY SOLD (Also know as TR=P X Q)
Total Costs = Fixed costs + Variable Costs
Fixed Costs are costs which don't change with output. For example, whether the firm makes any products or not they will still have to pay rent
Variable Costs therefore are costs which are directly affected by the production line e.g. raw materials are varible costs because how muchthe firmspends on them depends on how much output the firm produces
Total Costs therefore are both fixed and variables added together
Contribution = Selling Price per unit/product- Variable Cost per unit/product (C=P X VC)
Contribution is the amount made per unit produced which, when sold, the money made goes towards paying off fixed costs. IT IS NOT YET PROFIT.
Another way to explain is that contribution is the difference between the variable cost of producing the unit and its selling price.
Total Contribution =Contribution per unitXQuantity of units sold(TC=CPU X Q)
Total contribution therefore is the amount made from multiple sales which contribute towareds fixed costs or overheads.
Break Even Analysis
This can be done using the following formula:
BREAK EVEN = FIXED COSTS / CONTRIBUTION PER UNIT
This formula gives you the amount of units which need to be sold in order for the firm to break even.
Gross & Net Profit
Gross Profit = Direct Costs - Revenue
Gross profit is a larger amount that Net Profit. It becomes Net Profit when fixed costs are taken away from the amount
Direct costs are those directly associated with the production fo a product e.g. raw materials and hourly wages of the staff who produce the product are direct costs.
Indirect costs therefore are costs inccured which don't directly have anythign to do with producing a product such as the hourly wages of the canteen staff who provide a service within the firm to the workers. They aren't directly involved with producing the product which the firm then sells to consumers.
Net Profit = Total Costs - Revenue