Investment Management Certificate (IMC) Practice Exam

A company's profit is determined by which of the following equations?

1. Marginal Profit - Marginal Costs

2. Revenue - Expenses

3. Price × Volume

4. Revenue × Expenses

The correct answer is: Revenue - Expenses

The determination of a company's profit primarily hinges on comparing the revenue generated from sales to the expenses incurred in producing and selling goods or services. This relationship can be summarized by the equation: Profit = Revenue - Expenses. In this context, revenue represents the total income received from sales, while expenses encompass all costs associated with running the business, including operating costs, production costs, and overheads. Understanding this relationship is essential for assessing a company’s financial health; if revenues exceed expenses, the company is profitable, and conversely, if expenses surpass revenues, the company incurs a loss. While other options may relate to aspects of profitability, the most straightforward and widely accepted formula for calculating profit is the difference between total revenues and total expenses. For example, marginal profit and costs address more specific scenarios regarding incremental changes, not the overall profitability picture. Similarly, multiplying price by volume provides gross revenue without accounting for expenses, and revenue multiplied by expenses doesn't convey an accurate depiction of profit within established financial principles. Therefore, the correct equation for determining a company's profit is indeed revenue minus expenses.