2.2 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:

• Company A has an income of R1 400 000 and costs of R600 000.
• Company B has an income of R200 000 and costs of R50 000.

Activity 1:

Activity 2:

Activity 3