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# How does cost affect revenue and profitability?

###### 2007-05-14 02:26:40

There could be a variety of answers to this question, depending

on what perspectives you use to answer them. ( accounting,

economics etc ). Using my understanding of Economics, it's

important to first have an equation to link all these variables.

Profit = Revenue - Cost. This is called the profit equation, where

profit equals revenue minus cost. Revenue is the sales that you

obtain from day to day sales. It's expressed in a monetary value.

For example, if I am able to sell 10 hotdogs today at US dollar 5

for each hotdog, then my revenue for the day will be US Dollars 50.

However this is my revenue and not my profit, as I incurred cost

while earning this revenue. Lets say the cost of this business is

US Dollars 3. If this is the case the profit will be 50 - 3 which

equals 47. Hence profit is 47. This equation shows that an increase

in cost, can reduce the profit. At some instances, the increase in

cost can increase revenue, depending on the price that you are

selling and also the quantity sold. This will depend on how large

the increase is. Generally if Revenue is more than cost, there is

profit, while if Cost is more than revenue that is lost. If Revenue

equals Cost, there is break even. This means that the profit is

zero. Hope this helps. (cheong@bgymail.gd.cn)

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