Fundamentals of Cost Accounting 3rd Edition by William N. Lanen, Shannon W. Anderson, Michael Maher

Exercise 20

Profit Equation Components

Identify the letter of each profit equation component on the graph that follows.

Step 1 of 2

Profit equation components:

Total cost is the cost incurred by the producer. There are two types of cost; fixed cost and variable cost. Fixed cost, as the name suggests, remains fixed at all level of output. It means it is independent of production activity. The variable cost is dependent on production activity.

Thus, the total cost line starts with a positive intercept on the Y-axis.

Total revenue is the money earned by the producer. At zero output, the total revenue is zero. Thus, the total revenue line starts from origin.

Profit is the excess of total revenue over the total cost but when the total cost exceeds total revenue this situation is known as loss. The point where the total cost is exactly equal to total cost is the break-even point.