What Is the Profit Equation?
The profit equation is used to determine a company’s profitability and can be described in its simplest form as Profit = Sales minus Costs. “Costs” refers to a figure that reflects both fixed and variable costs combined. The figure for “sales” is derived by multiplying the number of units sold by their unit cost.
The simple profit equation can be extended to include the components of its parts and used to solve for an unknown. In this form, the equation is P + FC = Q x (SP – VC), in which FC reflects fixed costs, Q represents quantity of units sold, SP reflects the sales price of each unit and VC is the variable cost per unit. This formula can used, for example, to determine the quantity of units that must be sold (Q) to meet a targeted profit level (P).