2.3 : Profit Flashcards
What is the profit equation ?
Profit = total sales less total costs
What is profit in absolute terms ?
The £ value of profits earned.
What is profit in relative terms ?
The profit earned as a proportion of sales achieved or investment made.
What do profitability ratios provide ?
Is the business making a profit ?
How efficient is the business in turning revenue into profits ?
Is the profit enough to justify the investment into the business ?
What is the equation for gross profit ?
Revenue less cost of sales
What is the gross margin equation ?
Gross profit / revenue
What is operating profit ?
Is what is left after all the costs of a business have been taken from its revenue
What is the equation for operating profit margin ?
Operating profit / total revenues
What does the operating profit margin tell a business ?
How effectively they turn their sales into profits
How efficiently they run their business
Whether they are able to add value during the production process
Why do businesses compare operating profitability with other businesses ?
It can be compared with other competitors in the same market overtime to provide useful insights
How can business improve their profit ?
Sales: increase quantity sold + increase selling a price
Variable costs: reduce VC per unit
Fixed costs: increase output + reduce fixed costs
Why does higher quantity sold increase a businesses profit ?
Higher sales volumes = higher sales, assuming selling price doesn’t decrease.
Will it work : depends on the elasticity of demand and if the business has the capacity to sell more.
