PROFITPROFIT FORMULAFORMULA

Profit FormulaProfit Formula

Profit = Sales – Variable Cost – Fixed CostProfit = Sales – Variable Cost – Fixed Cost

P=S – V – FP=S – V – F P=S – (V+F)=(S-V)-FP=S – (V+F)=(S-V)-F

Where P = Total Profit, S=Sales valueWhere P = Total Profit, S=Sales value V= Total variable cost, F= Total V= Total variable cost, F= Total

Fixed CostFixed Cost

BREAK-EVEN ANALYSISBREAK-EVEN ANALYSIS

It is an application of CVP analysis which It is an application of CVP analysis which involves the method of presenting to involves the method of presenting to management the effect of changes in management the effect of changes in volumes on profits by indicating at what volumes on profits by indicating at what level the total cost and total revenue will be level the total cost and total revenue will be in equilibrium, i.e., by indicating the Break-in equilibrium, i.e., by indicating the Break-even Point. Break-even analysis is a even Point. Break-even analysis is a technique of having a preview of profit technique of having a preview of profit prospects and a tool of profit-planning by prospects and a tool of profit-planning by integrating the cost and revenue estimates integrating the cost and revenue estimates to ascertain the profits and losses to ascertain the profits and losses associated with different levels of output.associated with different levels of output.

BREAK-EVEN CHARTBREAK-EVEN CHART

It is a graphical representation from It is a graphical representation from which Break-even Point (BEP) and which Break-even Point (BEP) and related categories are determined related categories are determined graphically. The BE Chart depicts at graphically. The BE Chart depicts at various levels, the following information:various levels, the following information:

i) Variable costs, fixed costs and total i) Variable costs, fixed costs and total cost.cost.

ii) Break-even point.ii) Break-even point.

iii) Margin of Safety.iii) Margin of Safety.

iv) Sales value.iv) Sales value.

BREAK-EVEN-POINTBREAK-EVEN-POINTIt is that volume of production and sales where there is no profit or loss, i.e., where Total Revenue and Total Cost lines intersect.It is that volume of production and sales where there is no profit or loss, i.e., where Total Revenue and Total Cost lines intersect.

Total SalesTotal SalesOpening ProfitOpening Profit

Total Cost

Total Cost

Angle of Angle of incidenceincidence

Total Variable Cost

Total Variable Cost

Total Fixed CostTotal Fixed CostBEPBEP

Operating LossOperating Loss

MOSMOS(Units)(Units)

BEPBEP(Units)(Units)

Output (Units)Output (Units)O

1) CONTRIBUTION: 1) CONTRIBUTION: It is the excess of It is the excess of

sales revenue over and above the total sales revenue over and above the total

variable costs.variable costs.

Contribution=Sales – Variable CostsContribution=Sales – Variable Costs

Again since Profit=(Sales – Variable Cost) Again since Profit=(Sales – Variable Cost)

– Fixed Cost– Fixed Cost

Profit = Contribution – Fixed cost Profit = Contribution – Fixed cost

Contribution = Fixed Cost + Profit. Contribution = Fixed Cost + Profit.

2) PROFIT-VOLUME RATIO: It represents It represents

the ratio of contribution to sales and called the ratio of contribution to sales and called

as as p/v ratio p/v ratio . It has property fundamental . It has property fundamental

that that p/vp/v ratio remains constant at various ratio remains constant at various

levels of activity provided there is no levels of activity provided there is no

change in either selling price (per unit) or change in either selling price (per unit) or

variable cost (per unit).variable cost (per unit).p Contribution

v SalesSales VariableCost

Sales

PROFIT AS BUSINESS PROFIT AS BUSINESS OBJECTIVEOBJECTIVE

Accounting Profit vs. Economic ProfitAccounting Profit vs. Economic Profit

Accounting profit = TR – (W + R + I + M)Accounting profit = TR – (W + R + I + M)

Where Where WW = wages and salaries, = wages and salaries, RR= rent, = rent,

II = interest, = interest,

and and M M = cost of materials.= cost of materials.

CONTROVERSY OVER PROFIT CONTROVERSY OVER PROFIT MAXIMIZATION MAXIMIZATION

OBJECTIVE: OBJECTIVE: THEORY VS PRACTICE THEORY VS PRACTICE

Arguments in Defence of Profit Arguments in Defence of Profit Maximization HypothesisMaximization Hypothesis

Profit is indispensable for firm’s survival.

BAUMOL’S HYPOTHESIS OF BAUMOL’S HYPOTHESIS OF SALES REVENUE SALES REVENUE MAXIMIZATIONMAXIMIZATION

Baumol has postulated

maximization of sale revenue as

an alternative to profit-

maximization objective.

MARRIS’S HYPOTHESIS OF

MAXIMIZATION OF FIRM’S

GROWTH RATE

WILLIAMSON’S HYPOTHESIS OF

MAXIMIZATION OF

MANAGERIAL UTILITY

FUNCTION

DEFINITION OF NATIONAL INCOME

Conceptually, national income is the money

value of the end result of all economic

activities of the nation.

GROSS NATIONAL PRODUCT GROSS NATIONAL PRODUCT (GNP)(GNP)

The GNP is defined as the value

of all final goods and services

produced during a specific

period, usually one year, plus

incomes earned abroad by the

nationals minus incomes earned

locally by the foreigners.

GROSS DOMESTIC PRODUCT (GDP)

The Gross Domestic Product (GDP) is

defined as the market value of all

final gods and services produced in

the domestic economy during a

period of one year, plus income

earned locally by the foreigners

minus incomes earned abroad by the

nationals.

NET NATIONAL PRODUCT (NNP)

NNP is defined as GNP less depreciation, i.e.,

NNP = GNP – Depreciation

METHODS OF MEASURING NATIONAL INCOME

• Net Output or Value Added Net Output or Value Added Method Method

• Factor-Income Method Factor-Income Method

• Expenditure MethodExpenditure Method

MARGINAL PROPENSITY TO CONSUME (MPC)

The concept of The concept of MPC MPC is related to is related to

the marginal consumption-income the marginal consumption-income

relationship. In other words, MPC relationship. In other words, MPC

refers to the relationship between refers to the relationship between

change in consumption and change in consumption and

the change in income The the change in income The MPCMPC

is symbolically expressed as is symbolically expressed as

( C)

( Y)

C / Y

THE DYNAMICS OF INVESTMENT MULTIPLIER

The dynamics of multiplier The dynamics of multiplier

tells how a Multiplies into tells how a Multiplies into

. Investment means . Investment means

expenditure on factors of expenditure on factors of

production – capital and labour .production – capital and labour .

( Y)( I)

DETERMINANTS OF ECONOMIC GROWTH

There are four important determinants There are four important determinants of economic growth, viz.,of economic growth, viz.,

1.1. Human resources and its quality,Human resources and its quality,

1.1. Natural resources,Natural resources,

1.1. Capital formation, andCapital formation, and

4.4. Technological development Technological development

HARROD-DOMAR THEORY OF GROWTH

Both Harrod and Domar consider Both Harrod and Domar consider capital capital

accumulation accumulation as a key factor in the as a key factor in the process ofprocess of

economic growth.economic growth.

THE NEO-CLASSICAL MODELTHE NEO-CLASSICAL MODEL

According to the neo-classical model, rate of economic According to the neo-classical model, rate of economic growth depends on the growth rate of (i) capital stock, growth depends on the growth rate of (i) capital stock, K; (ii) labour supply, K; (ii) labour supply, L; and (iii) L; and (iii) technological progress technological progress over time, T. The relationship between the national over time, T. The relationship between the national output and these variables may be expressed in the output and these variables may be expressed in the form of a production function, i.e.,form of a production function, i.e.,

Y=F(K, L, T)Y=F(K, L, T)

Where Y= national output (at constant price), Where Y= national output (at constant price), K=stock of capital L = labour supply, and T= K=stock of capital L = labour supply, and T= the scale of technological progress.the scale of technological progress.

PHASES OF BUSINESS CYCLES

1.1. Expansion of economic activities, Expansion of economic activities,

2.2. Peak of boom or prosperity, Peak of boom or prosperity,

3.3. Recession, the downtrend, Recession, the downtrend,

4.4. Trough, the bottom of depression, and Trough, the bottom of depression, and

5.5. Recovery and expansion. Recovery and expansion.

Line of cycle Trough

Rec

over

y

Exp

ansi

on

Peak Recession

Steady Growth line

Exp

ansi

on

Prosperity

DepressionProsperity

THEORIES OF BUSINESS CTCLETHEORIES OF BUSINESS CTCLE

1. The Pure Monetary Theory,1. The Pure Monetary Theory,

2. The Monetary Overinvestment Theory ,2. The Monetary Overinvestment Theory ,

3. The Non- monetary Overinvestment 3. The Non- monetary Overinvestment

Theory ,Theory ,

4. Innovation Theory,4. Innovation Theory,

5. Acceleration Principle of Trade Cycle,5. Acceleration Principle of Trade Cycle,

CONCEPT AND OBJECTIVES OF CONCEPT AND OBJECTIVES OF STABALIZATIONSTABALIZATION

Stabalization does not mean creating Stabalization does not mean creating

condition for economic stagnation. condition for economic stagnation.

Stabalization and stagnation or Stabalization and stagnation or

freezing should not be treated as freezing should not be treated as

synonymous. Stabalization broadly synonymous. Stabalization broadly

means preventing the extremes of means preventing the extremes of

ups and down. ups and down.

FISCAL POLICYFISCAL POLICY

The ‘fiscal policy’ refers to the The ‘fiscal policy’ refers to the government policygovernment policy

of changing its taxation and of changing its taxation and public expenditurepublic expenditure

programmes intended to programmes intended to achieve certainachieve certain

predetermined objectives.predetermined objectives.

MONETARY POLICYMONETARY POLICY

Monetary policy refers to the central Monetary policy refers to the central bank’s programme of changing bank’s programme of changing monetary variables.monetary variables.

(i) (i) Open market operations,Open market operations,

(ii) (ii) changes in bank rate (or discount rate), changes in bank rate (or discount rate),

andand

(iii) (iii) changes in the statutory reserve ratios.changes in the statutory reserve ratios.

BASIS OF FOREIGN TRADEBASIS OF FOREIGN TRADE

The basis of international trade is The basis of international trade is the the

difference in the resource difference in the resource endowments of endowments of

the nations.the nations.

RICARDIAN THEORY OF RICARDIAN THEORY OF COMPARATIVE ADVANTAGECOMPARATIVE ADVANTAGE

The theory of absolute advantage gives The theory of absolute advantage gives

the impression that trade between two the impression that trade between two

countries can be possible and mutually countries can be possible and mutually

gainful only if both the countries have gainful only if both the countries have

absolute advantage absolute advantage in the production in the production

of at least one commodity and absolute of at least one commodity and absolute

disadvantage in the production of at disadvantage in the production of at

least one commodity.least one commodity.

TERMS OF TRADETERMS OF TRADE

Terms of trade is defined as the Terms of trade is defined as the quantity ofquantity of

domestic goods that must be given in domestic goods that must be given in exchange for exchange for

one unit of imported goods.one unit of imported goods.

FREE TRADE POLICYFREE TRADE POLICY

Free trade policy Free trade policy is based on the principle is based on the principle of of

non-interference by the government in non-interference by the government in the the

foreign trade.foreign trade.

THE BALANCE OF PAYMENTSTHE BALANCE OF PAYMENTS

DefinitionDefinition The balance of payment The balance of payment

is defined as “ a systematic is defined as “ a systematic

record of all economic transactions record of all economic transactions

between the residents of a country between the residents of a country

and residents of foreign countries” and residents of foreign countries”

during a certain period of time.during a certain period of time.

BALANCE OF PAYMENTS BALANCE OF PAYMENTS ACCOUNTSACCOUNTS

(i)(i) Current accounts andCurrent accounts and

(ii)(ii) Capital accounts.Capital accounts.

INDIRECT MEASURES TO INDIRECT MEASURES TO CORRECT ADVERSE BOPCORRECT ADVERSE BOP

(i) (i) Income measures, andIncome measures, and

(ii) (ii) Price measures.Price measures.

DIRECT MEASURE: EXCHANGE DIRECT MEASURE: EXCHANGE CONTROLCONTROL