COSTS & REVENUE Once a business has worked out how to produce, it needs to think about how much to produce.
Not for Profit Organizations Even if a business is a not-for profit organization it must still abide by the formula.
Non-Governmental Organizations (NGOs) NGOs need to make enough money to not only cover their immediate costs, but also to ensure that they can reinvest for the future. REVENUE Non-Operational Activities Sometimes a business can earn money from non-operational activities, such as selling shares in a subsidiary or company assets generally. Total Revenue Formula Total Revenue (TR) = Price (P) x Quantity (Q) Example If a car dealer were to sell 100 BMW 5 Series Cars in 2011 for $200,000 each, there would be $20,000,000 in revenue.
Profit Margin Fast Food Outlet vs Fine Dining Restaurant With a fast food outlet there is a very low profit margin as the competition is very fierce and demand is relatively elastic – so the business cannot afford to put their prices too high.
Fixed Costs - Examples Example A car dealer may have to pay for the rent of the car showroom, even if there are no customers. Semi-Variable Costs The semi-variable costs (also known as quasi- variable costs) are a combination of fixed and variable costs. Semi-Variable Costs Electricity Costs Electricity bills are usually split into a fixed element – the standing charge and a variable element – which is taken from the electricity meter and indicates how much has been used.
Contribution to Fixed Costs An important business tool is the contribution a product makes to the overall profitability of the business. Contribution to Fixed Costs In the Boston Consulting Group (BCG) matrix, this can be a difference between a star, cash cow and dog product. The Contribution Per Unit We can calculate the contribution per unit for the business by using the following formula: Contribution = price – variable costs (per unit) Example We sell a luxury care for $200,000. The Contribution Per Unit Further Explanation of Car Example Each car contributes $50,000 which can be subtracted from fixed costs to generate the eventual profit for the business.
BREAK EVEN ANALYSIS Another important tool to help production decisions is break even analysis. Semi Variable Costs & Break Even Analysis For break even analysis we do not consider semi-variable costs because this would make things must too complicated, so we must always divide costs into fixed or variable proportions.
Table Method for Break Even Analysis Example Question Business: A vendor selling face Rolex watches in the Philippines.
Table Method for Break Even Analysis Example Question (continued) Note that fixed costs (the fee for the right to sell watches) had to be paid up front before he had sold any watches – the sum was a one-off payment, no matter how many watches were sold.


Watches Example – Analysis After completing the previous table, it is obvious that the watch seller breaks even by selling 40 watches. The Formula Method for Break Even Analysis Break Even Quantity = Fixed Costs Contribution Per Unit. Graph Method For Break Even Analysis It is possible to transfer some of the information in the table to a graph. Strategic Business & IT Plan Presentation explains the dimension of the good governance and  the model of strategic management process starting from mission vision and goals, strategic analysis, strategic choice and strategic implementation. PHARINAS & ASENARIO ONE ASIA is dynamic Management Consulting, Training and Workshop Company which expertise is based on a mix of business, competency and strategic mapping with academic degrees.
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This will depend on a number of factors, but in most cases production managers will focus on at least ensuring that they have covered their costs and not made a loss. Although it may not make profits it must as least cover it costs and so no make any losses.
Eg: Greenpeace will need enough money to pay lobbyists or buy boats for direct action such as monitoring whaling for scientific purposes by Japanese vessels. Businesses often refer to these must pay costs as overheads as they appear as expenses in the profit & loss account, because they are indirect costs of production.
Example – Salary of a Car Salesperson The salary of the car salesperson is typically made up of two parts – a fixed element (the basic wage) and a variable element (the commission) which is dependent on the number of cars sold. When it knows this, a business can decide which product to focus on, so as to expand production, increase investment and ultimately improve sales.
A vendor has to pay a sum of $US1000 to secure the right to sell his watches outside the tourists hotels on the beach. The vertical axis will have costs and revenue on it and the horizontal axis will have the quantity of watches sold.
The amount of profit or loss is given by the vertical distance between the total cost and total revenue lines. We help clients to bridge the gap between management, people and technology, as well as, improve their strategies, organizations and operation. The following simple formula can act as decision- making framework PROFIT = TOTAL REVENUE – TOTAL COSTS.


It also known as sales, sales revenue or turnover, and it appears in the top line of a profit and loss account or part of cash in a cash flow statement. This means a fast food restaurant is dependent on a high volume of sales (for standardized mass produced meals) to generate sufficient profit to operate.
Eg: An internet company such as Amazon finds it much easier to accept credit card payments, but a local baker will obviously prefer cash. This is particularly useful for a business that has a range of products as the business will be able to judge whether one is outperforming another. Our Total Variable Costs are $15,000,000 Insert into formula: $200,000 - (15,000,000) = $50,000 per car.
The idea is to calculate the minimum product that would have to be sold for the business to break even – that is: just to cover the costs and no more than that.
He paid this to the local enforcers (mafia) On average a tourist would pay $US 50 for a watch and the watches typically cost him US $25 from his supplier.
To this we can add fixed costs, which we can draw as a line parallel to the horizontal axis starting at $1000. As the vendor sells more watches, his losses get smaller (the distance between total costs and total revenue gets less) After break even, the distance between total costs and total revenue increases, which means he makes more profit the more he sells.
All these items refer to the operational income of a business – that is money earned from its business operations. In contrast, the profit margin for a fine dining restaurant per customer will be significantly higher than the fast food chains average customer.
If a business manages to produce and sell more than the break even quantity it will make a profit. The line is parallel to the horizontal axis because these costs do not change as more watches are sold – the costs are fixed. Direct Debit: Money transferred from a bank account for regular payments such as mortgage or cable TV monthly fee.



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