How does cost affect revenue and profitability?
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. (firstname.lastname@example.org)