3.2 Business Costs and Revenue

Fixed vs. Variable Costs

Fixed costs stay the same regardless of production or sales level, like rent, insurance, and salaries. Variable costs change directly with output, like raw materials and hourly wages. Understanding this split helps businesses predict expenses at different production levels and set prices that cover both types of costs.

Revenue and Profit

Revenue is the total income from selling goods or services, calculated as price × quantity sold. Profit is what remains after subtracting total costs (fixed + variable) from revenue. A business is profitable when revenue exceeds total costs; if costs exceed revenue, the business operates at a loss.

Break-Even Point

The break-even point is the sales level where total revenue equals total costs — no profit, no loss. It's calculated as fixed costs ÷ (price per unit − variable cost per unit). Businesses use this to determine how many units they must sell before turning a profit, guiding pricing and production decisions.

Key terms

Fixed Costs

Expenses that remain constant regardless of production level, such as rent and insurance.

Variable Costs

Expenses that change directly with production output, such as raw materials and hourly wages.

Revenue

Total income earned from selling goods or services, calculated as price × quantity sold.

Profit

The amount remaining after total costs are subtracted from revenue.

Break-Even Point

The sales level at which total revenue equals total costs, resulting in no profit or loss.

Try an AP-style question

What is the break-even quantity?

1. 200 units
2. 1,000 units
3. 333 units
4. 500 units