In the business world, achieving optimal profit is a goal sought by entrepreneurs. In financial analysis, knowledge of profit calculation is a fundamental skill that entrepreneurs need to possess.
Based on basic theory, the formula used to calculate profit is: Profit = Total Revenue (TR) – Total Cost (TC). This article will discuss the profit formula along with its explanation, and Kanda Data will also provide examples of its application in a business context.
Total Revenue (TR)
Total Revenue (TR) is the amount of money generated from the sale of goods or services. All sales generated from goods or services constitute the total revenue. The formula used to calculate total revenue is:
𝑇𝑅 = 𝑃×𝑄
Where:
TR: Total Revenue
P: Price per unit of goods or services
Q: Quantity of goods or services sold
For example, if a company sells 1,000 units of a product at $2 per unit, the TR is:
TR = 1,000×2 USD= 2,000 USD
This total revenue represents the income before deducting the costs that the company must bear.
Total Cost (TC)
Total Cost (TC) is the sum of all expenses incurred to produce goods or services. Total costs are divided into two main categories: Fixed Costs (FC) and Variable Costs (VC).
Fixed Costs are expenses that do not change with the level of production, such as building rent, permanent staff salaries, and depreciation. Variable Costs are expenses that change with the volume of production, such as raw material costs, production input costs, and direct labor wages.
The formula to calculate TC is:
TC=FC+VC
Where:
TC = total cost
FC = Fixed cost
VC = Variable cost
For example, if a company’s fixed costs are 500 USD and the variable cost per unit is 1.2 USD, and the company produces 1,000 units, then:
VC=1,000×1.2 USD = 1,200 USD
TC=500 USD (FC)+1,200 USD(VC) = 1,700 USD
Calculating Profit
After determining TR and TC, we can calculate profit using the formula:
Profit=TR−TC
Using the previous example:
Profit= 2,000 USD – 1,700 USD = 300 USD
Thus, the profit earned by the company is 300 USD.
Profit analysis helps companies evaluate their business performance. By knowing how much profit is generated, companies can measure the effectiveness of their sales and operational strategies. If TC is too high, the company may need to find ways to reduce costs or increase selling prices.
Application Example in Business
A shoe manufacturing company has fixed costs of 2,000 USD per month, which include factory rent, managerial salaries, and utility costs. The variable cost per pair of shoes is $20, covering raw materials, direct labor wages, and other production costs. If the company sells shoes for $30 per pair and produces and sells 500 pairs of shoes in a month, then:
TR = 500 x 30 USD = 15,000 USD
VC = 500 x 20 USD = 10,000 USD
TC = 2,000 USD + 10,000 USD = 12,000 USD
Profit = 15,000 USD – 12,000 USD = 3,000 USD
Therefore, the profit generated is 3,000 USD per month. Profit analysis is a fundamental tool in financial management and business decision-making. By understanding the components of TR and TC, companies can measure performance, identify areas for improvement, and plan for a better future.
Through the provided example, we can see how the application of this formula can provide valuable insights for business success. This concludes the article that Kanda Data can write at this time. Stay tuned for more updates from Kanda Data in the future.
