122 ratio analysis

Question 1

what is gross profit margin

Answer 1

-the percentage of money (sales revenue) left after paying for a business’ costs of sales
-It shows how much gross profit is made for every pound of sales revenue received.
-It assesses how well businesses manage variable costs (cost of sales) in the business.

Question 2

gross profit margin calculation

Answer 2

gross profit
——————— x 100
revenue

Question 3

what is net profit margin

Answer 3

is the proportion of sales revenue that is left once all costs have been paid, shows how much net profit is made for every pound of sales revenue it receives
net profit margin will always be lower than the gross profit margin because it accounts for all business costs

Question 4

net profit margin calculation

Answer 4

net profit
—————- x 100
revenue

Question 5

interpreting gross profit

Answer 5

-restaurants would have high gross profit because ingredients are cheap so costs of sales are low , prices are high , so high revenue
-watch maker would have low gross profit margin because they can’t make it too expensive- so gross profit would be low

Question 6

factors affecting GPM

Answer 6

-selling price
-demand
-competition
-change in raw materials

Question 7

net profit interpreting

Answer 7

shows what percentage of profit the business makes after paying all expenses running the business. eg. fixed costs , variable costs
-new business have low NPM ,as they will spend money on adverting ext , leading to high expenditure, so make less profit at this point

Question 8

evaluating net profit margin

Answer 8

NPM of 18% +-> may be regarded as good , indicating effective business management of costs and expenses
NPM of 10-17% -> regarded as satisfactory, but cost or expenses management could be improved
NPM of less than 10% -> could be regarded as poor ,need to improve cost and expenses management

Question 9

evaluate gross profit margin

Answer 9

jewellers may have high GPM (60-80%) -> sell their goods two/three times the price they paid their supplier
low GPM businesses include supermarkets, manufacturer
high GPM business include restaurants

Question 10

improving gross profit margin

Answer 10

changing supplier - because you can reduce the cost of raw materials increasing gross profit margin -> however (A04) quality of products can worsen , less sales , less revenue
increasing sale price - maximise profit , high revenue -> (A04) increased price may put customers away (price elasticity)

Question 11

improving net profit margin

Answer 11

redundancies because it reduces overall costs , so reduces wages -> however (A04) you need plenty workers for efficiency increasing net profit , and can ruin brand reputation of they can’t keep up with demand
increasing promotion budget- because more people become aware- more sales -> (A04) depends on how successful the promotion is and could lead to a loss if not done right