Chapter 3, Problem 1RQ

Write out the profit equation and describe each term.

To determine

Define the profit equation and its items.

Explanation of Solution

Profit equation:

Profit equation states the company’s profitability by comparing the total sales and total cost of the company. The profit is computed in the following manner:

$\text{Operating}\text{Profit}\left(\text{P}\right)\text{ = Total}\text{Sales (TS)}-\text{ Total Cost}\left(\text{TC}\right)$

Elements of profit equation:

Operating profit: Operating profit is calculated as the difference between the total sales and the total costs of the company. Profit arrives when the amount of sales is higher than the cost. Loss arrives when the amount of sales is lower than the total cost.

Total sales: Total sales is that amount which is generated from the rendering of goods and services in a specific period of time.

Total costs: Total cost is the amount that the company has incurred due to its business activities. Total cost consists of the variable cost (VC) and fixed cost (FC).

$\text{Total cost }\left(\text{TC}\right)\text{= Variable cost }\left(\text{VC}\right)\text{+ Fixed cost}\left(\text{FC}\right)$