What Makes a Product Financially Viable
Profit/loss
Contents
Profit is what is left when total costs are subtracted from revenue. It is calculated as profit = total revenue − total costs. Revenue is the income a business receives from selling its products, before anything is taken away; profit is what survives once the costs of making those sales have been covered. A business can have high revenue and still end up with very little profit if its costs are high too.
Profit, loss and zero profit
When total revenue is greater than total costs, the answer is positive, so the business makes a profit. When total costs are greater than revenue, the answer is negative and the business makes a loss. In between sits zero profit: revenue exactly equals total costs, so nothing is left over but nothing is lost either.
A loss is a negative profit, not negative revenue. The business has still sold its products and taken money in, so its revenue stays a positive income figure; only the profit has fallen below zero. Imagine a craft stall selling candles that takes £750 in a month but spends £1,050 on wax, wicks, jars and the pitch fee. Revenue is £750 and profit = £750 − £1,050 = −£300, so the stall makes a loss of £300.
| Month | Total revenue | Total costs | Revenue − total costs | Outcome |
|---|---|---|---|---|
| January | £750 | £580 | £170 | Profit of £170 |
| February | £750 | £750 | £0 | Zero profit |
| March | £750 | £1,050 | −£300 | Loss of £300 |
To find profit or loss from the two totals, subtract total costs from total revenue and read the sign of your answer: positive is a profit, negative is a loss, zero means neither. Always use revenue and costs for the same time period, because a month's revenue measured against a year's costs tells you nothing useful about how the business is doing.
Profit per unit is the amount a business makes or loses on one item sold. You calculate it as selling price per unit − total cost per unit. Total cost per unit is the total costs for the period divided by the number of units made or sold in that period.
Profit or loss on one unit
Subtract total cost per unit from selling price per unit. Do not subtract total costs from total revenue; that finds total profit or loss, not the figure for one unit.
If the selling price per unit is higher than the total cost per unit, the business makes a profit on each unit. If total cost per unit is higher, the result is negative: a loss per unit. For example, a selling price of £8 and total cost per unit of £10.50 gives £8 − £10.50 = −£2.50, a loss of £2.50 per unit. The selling price is still £8; it is the profit figure that is negative. If the two figures are equal, profit per unit is zero, so the business makes neither a profit nor a loss on that unit.
Scaling to a whole output
When the same profit or loss per unit applies to every unit, multiply it by the number of units to find the total for the whole output. A profit of £3.20 per unit on 180 units is £3.20 × 180 = £576 total profit.
Only multiply when the per-unit figure is constant. If a bulk discount makes the cost per unit fall as output rises, one per-unit figure does not apply to every unit. In that case, do not multiply it; use the total costs and total revenue for that output instead.
To calculate profit or loss for a given level of output, find the total revenue for that output and the total costs for that output, then subtract total costs from total revenue. A positive answer is a profit, a negative answer is a loss, and a result of zero means the enterprise has made neither a profit nor a loss on that output.
Work through it in stages
A student enterprise making scented candles sells a batch of 150 at £6 each. Workshop hire for the batch is £250 and each candle uses £2.20 of wax and wick.
| Stage | Working | Amount |
|---|---|---|
| Total revenue | 150 × £6 | £900 |
| Variable costs | 150 × £2.20 | £330 |
| Fixed costs | workshop hire | £250 |
| Total costs | £330 + £250 | £580 |
| Profit | £900 − £580 | £320 |
Where fixed and variable costs are given separately, add them to find total costs before you subtract. Leaving the fixed costs out would make the profit look bigger than it really is.
Keep per-unit and total figures apart
You can work out profit or loss for a single unit, for a batch or for a whole output, but the two figures you subtract must be the same kind. Subtracting total costs from the selling price of one candle, or subtracting cost per unit from total revenue, mixes the two types and gives a meaningless answer. If you are given only per-unit figures, find the profit or loss per unit first and then scale it up by multiplying by the number of units, as long as that per-unit figure is the same for every unit.
Check the time period
Every figure must cover the same period. If a market stall costs £240 a month but you want the profit for a year, the fixed costs for that year are 12 × £240 = £2,880, and you must use a full year of revenue and variable costs. Comparing a yearly figure with a monthly one gives a badly wrong answer. Label each stage of your working so the method is easy to follow.
Profit is what is left from total revenue after total costs are paid: profit = total revenue − total costs. To find a missing figure, rearrange the formula first, then substitute the numbers.
Finding total costs or revenue
From profit = revenue − total costs, you can rearrange to get total costs = revenue − profit and revenue = profit + total costs. For example, a stall takes £840 revenue and makes £150 profit, so total costs = £840 − £150 = £690.
When the business makes a loss
A loss happens when total costs are greater than revenue. The profit is negative, so profit = −loss. If a loss is given as a positive amount, use these rearrangements: total costs = revenue + loss and revenue = total costs − loss. For example, revenue is £900 and the loss is £130, so total costs = £900 + £130 = £1,030.
Keeping the negative sign
A negative profit result means a loss, not negative revenue. If profit is written as a negative number, keep the sign when rearranging. For example, revenue is £640 and profit is −£75. Total costs = £640 − (−£75) = £640 + £75 = £715, because subtracting a negative adds it on.