Unit 2: Income, expenditure,profit and loss, break -even analysis

Introduction

In this unit you will focus on Selling price, Cost price, Income, Expenditure and Break even analysis

Learning Outcomes

By the end of this Unit, you should be able to:

• Identify and perform calculations involving income, expenditure, profit and loss values.
• Determine break-even values

Cost price and Selling price

For a business to make money it needs to sell goods or services for more than it cost.
• The cost price is how much the item cost the business.
• The selling price is how much the business gets for the item.
• A business may offer the customer a discount on items. This means that the customer will pay
less than the selling price for the item.
• The profit a company makes is determined by the difference between the selling and cost price.
If the selling price is less than the cost price, the company will make a loss.
• For example: A clothing shop paid R123 for a trouser and sold them at R177 each. Calculate the
percentage profit that the clothing shop made on the sale of the shirts.
Answer: Profit = R177 – R123 = R54
% profit = 54
123 × 100 = 43,9%

Income and Expenditure

• Profit means making more money than you spend.
• Profit is calculated by taking the difference between its income and expenditure.
• However, the costs involved before you can sell the product is also important.
• The cost may include more than just the purchase or production cost of an item.
A retailer may buy products and then ship them to a warehouse where they have to be prepared
for sale. All these steps add to the cost of an item.
• The costs may be divided into variable and fixed expenses.
• Fixed expenses:
✓ Costs that remain constant over time
✓ For example: rent, salaries, security, insurance, rates and taxes, etc.
• Variable expenses:
✓ Depend on the production level, as the production volume goes up, so will the costs
✓ For example: commissions, material costs, water and electricity, petrol etc.
• Income may also be divided into fixed and variable
• Fixed Income
✓ Fixed income is money that is definite on a monthly basis.
✓ For example: salary received monthly
• Variable income
✓ Variable income changes from month to month and is
✓ It is irregular and often unexpected
✓ For example: royalties, dividends
• Profit Margin
✓ Profit margin is the percentage of the final selling price that is profit.
✓ Profit = Selling price – cost price
✓ to calculate profit margin we use the formula:

✓ The profit margin is a better indication of how well a product or company is doing.
✓ For example: Consider the following 2 scenarios to establish a better company:
➢ A company A has an income of R1 400 000 and costs of R600 000.
➢ A company B has an income of R200 000 and costs of R50 000.

Break Even Analysis

• A financial tool which helps you to determine at what stage a company or product, will be profitable.

Watch the videos below for an easy explanation of break even analysis.