Market cost and Revenue Analysis

Cost and revenue analysis refers to examining the cost of production and sales revenue of a production unit or firm under various conditions. The objective of a firm is to earn profit, and not to make loss. However, a firm’s profit or loss is primarily determined by its costs and revenue. In simple terms, profit / loss is defined as the difference between the total revenue and the total cost i.e.,

Profit (or) Loss = Total Revenue – Total Cost

As costs and revenue are very important to decide the production behaviour of a firm and its supply behaviour in the market, it is necessary to understand the cost and revenue concepts.

Costs

Companies incur costs in many ways. Costs result from the production of goods, the purchase of inventory, the operating of the business, and the purchase of assets. These costs include the fixed and variable costs associated with production, depreciation and investment costs, and general and administrative costs. Costs also include opportunity costs, sunk costs and marginal costs. Cost analysis identifies and investigates the sources and components of these costs. Cost analysis has several different names, including cost allocation, cost-benefit analysis and cost-effectiveness analysis.

What Cost Analysis Reveals

Cost analysis helps a company determine the expected costs and benefits of a particular asset, new product, or plan of action before it makes the requisite investment. An in-depth cost analysis can reveal hidden costs embedded in a company’s normal way of doing business and the unanticipated costs of certain actions. Identifying and then stripping out costs can help a company increase its profitability and long-term viability. Cost analysis also aids companies in changing their service and product delivery procedures to those that are more cost-efficient and effective.

Revenues

Companies generate revenues from sales of their products and services. To generate more revenues, companies can increase the prices of existing products and services, offer add-on services for an additional price, or introduce new products or services at a higher price point. Companies can also increase revenues by increasing the quantity sold. Firms accomplish this by lowering prices or increasing their marketing efforts to stimulate demand.

What Revenue Analysis Reveals

Revenue analysis helps companies determine how to increase their revenues significantly. When combined with cost analysis, it helps companies do this while keeping costs at a minimum. Revenue analysis aids companies in assessing which course of action produces the highest increase in revenue with the least effort. For example, a company determines that it takes a series of press releases, website testimonials, and well-placed classified ads to drastically increase sales of a particular product, but it also determines that adding a low-cost add-on to a higher priced service would have the same effect.

Break-Even

The break-even point for a product or service occurs when revenue generated by the product equals the costs incurred in producing, selling and delivering the product. Break-even analysis blends cost and revenue analysis to help companies determine if a new product or service makes financial sense. While companies may focus solely on cost analysis for the purpose of cost reduction, most companies use revenue analysis combined with cost analysis to choose the revenue option that produces the most profit.