Posted On February 27th, 2020 by Profit Network Australia
‘Profit’ is one of those words that ever business person hears about, talks about and ultimately WANTS.
As MP Pauline Hanson would say “ Please Explain!”
Fixed and Variable Costs are Business INPUTS and these represent the costs incurred by your business.
Fixed Costs are cost that remain constant (do not change) whether the business sells their products/ services. Some examples of Fixed Costs are Rent, Rates, Insurance Interest to name a few.
Variable Costs are cost that Vary (Move Up and Down in Price) according to the sales volume. Examples include Material Costs, Sales Commissions, Transportation and Packaging.
So, if we add the Fixed & Variable Costs TOGETHER they will make up the COST PRICE of the product or service.
Outputs. Ok, we have now worked out our Business Inputs and by combining them in this way we have created a product/ service that can be provided to the customer.
I am a card maker. My output to make 1 card is $2, then we call this our COST PRICE.
We do not sell the card at the COST PRICE as we want to sell it at the SELLING PRICE and this is where we use BREAK EVEN ANALYSIS.
So to sum up:
“PROFIT” is the amount of $ between the COST PRICE and the SELLING PRICE and only happens when the Selling Price is HIGHER than the Cost Price.
Card Selling Price is $8 and its Cost Price is $2 then the PROFIT is $6.