Introduction to Profit, Loss and Break-Even

Definitions

The total amount the business spends is called the Total Costs (TC).
The total amount the business receives is called the Total Revenue (TR), known also as sales.
To break-even means that there has been no profit and no loss.
When a business receives more than it spends, it makes a profit.
When a business receives less than it spends, it makes a loss.
When a business receives and spends the same amounts, we say it breaks even (no profit and no loss).
It is very important for a business to know the break-even point.
The difference between total revenue (TR) and total costs (TC) is the net income (NI).
Net Income (also known as Total Profits) = Total Revenue − Total Costs

NI = TR − TC

If TR = TC, NI = 0 Break Even
If TR>TC, NI > 0 Profit
If TR

Other important remarks:

Revenue is different than Profit
Minimum revenue is Zero
Revenue can't be negative
Net income can be negative (Loss)
The capacity for the period = the maximum number of units
The slope of the TR line gives the SP per unit

Examples:

Example 1:
Last month, the total revenue of an electronics store in New York City was $60,000. The total costs were $35,000.
Question: Did the store make a profit or loss and by how much? Calculate the profit or loss as a percentage of the total costs?
Solution:
Based on the formula: NI = TR − TC = $60,000 − $35,000 = $15,000
Since the answer is positive so the store made a profit of $15,000.
Profit or loss as a percentage of TC = Profit or Loss ÷ TC = 15000 ÷ 35000 = 0.4285, which represents %42.85

Example 2

Assume the daily total costs of a small restaurant in San Francisco are $2,000.
Question: How much revenue does the restaurant need to break even?
Solution:
The restaurant needs revenue of $2,000. So the question is when the total revenue is less than $2,000 the owner will lose money.
It is clear that anything over $2,000 is profit.
So, the restaurant must make $2,000 to break even.

The total profits of a small printing company in Fresno were $50,000 in 2015. The total costs were $70,000.
Question: Calculate the total revenue in 2015 and then calculate the profit as a percentage of TR.
Solution:
Based on the formula: NI = TR − TC = TR − $70,000 = $50,000; after substitution, TR = $120,000
Profit or loss as a percentage of TR = Profit or Loss ÷ TR = 50,000 ÷ 120,000 = 0.4166, which represents %41.66

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Date of last modification: March 19, 2019