The aim of the study was to analyse the impact of production parameters and production focus on the revenues and costs in dairy sheep farm. A real production and economic data of monitored farms with Improved Valachian breed were used for comprehensive modelling of the production system. Consequently, the impact of different level in production factors on the economics of the production system was analysed. For most combinations of production factors with improved level of production, the value of costs was higher compared to revenues (by 12 eur to 71 eur/ewe and year) and they influenced both, revenues and costs. However, the intensity of change was the most important in this case. Increase of revenues was more intensive compared to costs when the whole milk production was processed directly to cheese (42 % vs. 6 %) and milk yield per ewe was improved (57 % vs. 9 %). A significant progress regarding the efficiency of incurred costs was achieved when production parameters reached the level characterized by the breed standard. In that case, revenues increased by 9 % but costs fell down by 3 %. Achieving the biological potential of the sheep breed is the basis to improve the effective utilisation of costs and thus for the sustainability of sheep farming in marginal areas.