ABSTRACT
The shortcomings of the opportunistic approach embedded in the first formula and the cost-plus mentality implied in the second have led to the third formulation, which may be called ‘the market-oriented approach’, where the starting point is the customer and the price that he is willing to pay. The degree of uncertainty surrounding the profit level and profit margin can, of course, be greatly reduced by adopting ‘the cost-plus approach’, epitomized by the second formula. Revenue is the total amount of money obtained from selling products and services, while the total cost is the monetary value of employing various resources to produce and supply these products and services. The residual amount from the separate processes is profit, and since it is derived as the difference between two relatively large numbers, which are often variable and subject to fluctuations, it tends to be highly volatile and often strictly unpredictable.
