1. Fixed Costs

Fixed costs are the costs that do not change with the level of output or sales. These costs are incurred regardless of how much a company produces or sells.

Examples include rent, salaries of permanent employees, insurance, and depreciation.

• Key characteristic: Fixed costs remain constant even if the production level changes.

2. Variable Costs

Variable costs are costs that change in direct proportion to the level of production or sales. As production or sales increase, variable costs increase, and as production or sales decrease, variable costs decrease.

Examples include raw materials, direct labor costs, and commissions.

• Key characteristic: Variable costs vary with the volume of production or sales.

3. Sales Revenue: 

Sales Revenue = Total units sold × Selling price per unit

It is the total monetary value of a company’s sales before deducting any expenses like cost of goods sold, operating expenses, or taxes.

Sales Revenue forms the basis for Profit Calculation

• Profit = Revenue – Expenses.
• Revenue = Profit + Expenses
• Revenue = Profit + Fixed Costs + Variable Costs

🔹 Types of Sales Revenue:

1. Gross Sales Revenue:

   • This is the total unadjusted sales before any returns, discounts, or allowances.

   • Example: Selling 1,000 units at ₹100 = ₹1,00,000 gross sales revenue.

2. Net Sales Revenue:

   • Adjusted figure after subtracting sales returns, discounts, and allowances.

   • Net Sales = Gross Sales – (Returns + Discounts + Allowances)

🔹 Cash vs. Credit Sales Revenue:

• Cash Sales Revenue: Income from immediate payments.

• Credit Sales Revenue: Income expected from customers at a later date.

🔹 Example:

A furniture company sells 500 chairs at ₹2,000 each.

• Gross Sales Revenue = 500 × ₹2,000 = ₹10,00,000

• If returns and discounts = ₹50,000, then

• Net Sales Revenue = ₹10,00,000 – ₹50,000 = ₹9,50,000

4. Contribution Margin

The contribution margin is the difference between sales revenue and variable costs. It represents the amount of sales revenue available to cover fixed costs and contribute to profits.

Formula for Contribution Margin (Total):

$$\text{Contribution Margin}=\text{Sales Revenue }-\text{Total Variable Costs}$$

Formula for Contribution Margin (Per Unit):

$$\text{Contribution per Unit}=\text{Selling Price per Unit }-\text{Variable Cost per Unit}$$

Key Components of Contribution:

• Contribution margin is the difference between the selling price of a product and its variable costs.

• It indicates how much money from each sale is available to cover the company’s fixed costs and generate profits.

Example:
If a product sells for ₹100 per unit and the variable cost per unit is ₹60, the contribution margin per unit would be:

$$\text{Contribution per Unit}=100-60=\; ₹40$$

This means that ₹40 from each sale contributes to covering fixed costs and, once they are covered, becomes profit.