Calculating revenue, costs and profit

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Revenue: the value of total sales made by a business within a period, usually one year.

Costs: Expenses incurred by a firm in producing and selling its products; likely to include expenditure upon wages and raw materials.

Profit: The difference which arises when a firm's sales revenue exceeds its total costs.

Revenues:

When starting, businesses should expect low revenues due to:

  • not well known product/service
  • unlikely to produce large quantities of output
  • difficult to charge high price for a product that's not established on the market

Formula for calculating revenue:

Sales revenue=volume of goods sold x average selling price

In order to keep high revenues from relatively few sales, a business has to be sure that consumers will be willing to pay a high price and that competition won't appear. A way to ensure this is to have a unique, special product/service.

Another way to increase revenue is to charge a low price in order to sell as many products as possible.

Costs of production:

  • Managers need to know cost of production to assess whether it's profitable or not to supply the market at the current price.
  • They need to know actual costs to allow comparisons with their forecasted(or budgeted) costs of production. This allows them to make judgements concerning cost-effiency of various parts of the business.

Fixed costs:

Fixed costs are costs which don't vary directly with the level of output. They're linked to time rather than the level of business activity. They exist even if a business

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