Costs and revenue

Revenue is money coming in from sales, not profit. To understand a business decision, subtract relevant costs and ask what changes with one more unit.

Lesson 2 of 33 parts Practice Flashcards

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Total revenue and Fixed cost

Objective: Explain total revenue and fixed cost, distinguish their meanings, and apply them to a described case.

Total revenue: Total revenue equals selling price times units sold for one uniform-price product. Fixed cost: A fixed cost does not change with output over the specified range and period. Consumer and producer decisions depend on constraints, alternatives, information, and expectations. Accounting quantities must be defined consistently: revenue is not profit, and a past unrecoverable cost differs from a future avoidable cost. Competition can change both prices and product attributes. Use a stated time period and output range when comparing costs, because a cost treated as fixed in one interval may change in another. Application: A firm sells ten items for five dollars each. This most directly illustrates total revenue. A monthly lease stays unchanged as production varies. This most directly illustrates fixed cost.

Worked examples

Try itOriginal teaching scenario: A firm sells ten items for five dollars each. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: A firm sells ten items for five dollars each. Step 2 — Recall the relevant idea: Total revenue equals selling price times units sold for one uniform-price product. Step 3 — Connect the observation to the idea: The scenario is an illustration of total revenue. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

Try itOriginal teaching scenario: A monthly lease stays unchanged as production varies. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: A monthly lease stays unchanged as production varies. Step 2 — Recall the relevant idea: A fixed cost does not change with output over the specified range and period. Step 3 — Connect the observation to the idea: The scenario is an illustration of fixed cost. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

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Total revenue and Fixed cost

Objective: Explain total revenue and fixed cost, distinguish their meanings, and apply them to a described case.

Worked examples

Try itOriginal teaching scenario: A firm sells ten items for five dollars each. Which idea from this section does it most directly illustrate?Show answer

Try itOriginal teaching scenario: A monthly lease stays unchanged as production varies. Which idea from this section does it most directly illustrate?Show answer

Variable cost and Profit

Objective: Explain variable cost and profit, distinguish their meanings, and apply them to a described case.

Variable cost: A variable cost changes with the amount produced. Profit: Profit equals revenue minus the relevant measure of total cost. Consumer and producer decisions depend on constraints, alternatives, information, and expectations. Accounting quantities must be defined consistently: revenue is not profit, and a past unrecoverable cost differs from a future avoidable cost. Competition can change both prices and product attributes. Use a stated time period and output range when comparing costs, because a cost treated as fixed in one interval may change in another. Application: Ingredient expense rises when more meals are prepared. This most directly illustrates variable cost. A calculation subtracts expenses from sales receipts. This most directly illustrates profit.

Formulas

Accounting profit = revenue - accounting costs

Worked examples

Try itOriginal teaching scenario: Ingredient expense rises when more meals are prepared. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: Ingredient expense rises when more meals are prepared. Step 2 — Recall the relevant idea: A variable cost changes with the amount produced. Step 3 — Connect the observation to the idea: The scenario is an illustration of variable cost. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

Try itOriginal teaching scenario: A calculation subtracts expenses from sales receipts. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: A calculation subtracts expenses from sales receipts. Step 2 — Recall the relevant idea: Profit equals revenue minus the relevant measure of total cost. Step 3 — Connect the observation to the idea: The scenario is an illustration of profit. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

Try itA firm sells 11 items at $20 each and incurs total accounting costs of $120. Ignoring taxes and any omitted costs, what is accounting profit?Show answer

Step 1 — Identify the quantities and assumptions in the prompt. Step 2 — Select the relationship: Accounting profit = revenue - accounting costs. Step 3 — Calculate: (11 x 20) - 120 = 100. Step 4 — Report with units: 100 dollars. This result applies to the stated example, not a forecast or personal recommendation.

Average cost and Sunk cost

Objective: Explain average cost and sunk cost, distinguish their meanings, and apply them to a described case.

Average cost: Average cost is total cost divided by output. Sunk cost: A sunk cost is already incurred and cannot be recovered by the current choice. Consumer and producer decisions depend on constraints, alternatives, information, and expectations. Accounting quantities must be defined consistently: revenue is not profit, and a past unrecoverable cost differs from a future avoidable cost. Competition can change both prices and product attributes. Use a stated time period and output range when comparing costs, because a cost treated as fixed in one interval may change in another. Application: A firm spreads total production cost across units produced. This most directly illustrates average cost. A nonrefundable past expense should not determine an otherwise forward-looking decision. This most directly illustrates sunk cost.

Worked examples

Try itOriginal teaching scenario: A firm spreads total production cost across units produced. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: A firm spreads total production cost across units produced. Step 2 — Recall the relevant idea: Average cost is total cost divided by output. Step 3 — Connect the observation to the idea: The scenario is an illustration of average cost. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

Try itOriginal teaching scenario: A nonrefundable past expense should not determine an otherwise forward-looking decision. Which idea from this section does it most directly illustrate?Show answer

Step 1 — Read the observation: A nonrefundable past expense should not determine an otherwise forward-looking decision. Step 2 — Recall the relevant idea: A sunk cost is already incurred and cannot be recovered by the current choice. Step 3 — Connect the observation to the idea: The scenario is an illustration of sunk cost. Step 4 — Check the limit: This short scenario illustrates the concept; it does not establish every detail or exclude every other influence in a real situation.

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