How is profit affected by both direct costs and overheads?

The correct understanding is that profit is calculated by subtracting both direct costs and overheads from revenue. This means that to determine profit, one must take the total income generated from sales and deduct all associated costs. Direct costs are those directly attributable to the production of goods or services, such as raw materials or labor. Overheads, on the other hand, are indirect costs that support business operations, such as rent, utilities, or administrative expenses.

When calculating profit, the formula typically used is:

Profit = Revenue - Direct Costs - Overheads

This illustrates that any increase in costs, whether direct or overhead, will decrease profit if revenue remains constant. Therefore, understanding how these costs interact with revenue is crucial for assessing overall profitability and making informed financial decisions.