2.3.1 Profit

Question 1

define profit

Answer 1

profit is the money left over after all costs have been accounted for

total revenue - total costs

Question 2

how do you calculate percentage change in profit

Answer 2

current years profit - previous years profit
————————————————————- X 100
previous years profit

Question 3

what are the three types of profit

Answer 3

1 gross profit
2 operating profit
3 profit for the year (net profit)

Question 4

what is gross profit

Answer 4

gross profit = sales revenue - cost of sales

cost of sales is any costs directly related to making the product (variable costs)

Question 5

what is operating profit

Answer 5

gross profit - operating expenses

operating expenses are not related to output (fixed costs etc.)

Question 6

what is net profit

Answer 6

operating profit - interest paid and one-off costs

Question 7

what is a statement of comprehensive income (or profit loss account)

Answer 7

• shows how much revenue and how many expenses have been coming in and out of the business over a given period (usually 12 months)

Question 8

how do you calculate gross profit margin

Answer 8

gross profit / revenue X100
- usually the higher the GPM the better, however some firms with a high sales volume may have a low GPM

Question 9

how can gross profit margin be improved

Answer 9

• increasing prices
• reduces direct costs of production

Question 10

how do you calculate operating profit

Answer 10

operating profit / revenue X100
- best if its high

Question 11

how can operating profit be increased

Answer 11

• increasing prices
• reducing costs of sales and operating expenses

Question 12

how do you calculate net profit margins

Answer 12

profit for the year (net profit) / revenue X100
- gives the best overall impression for how profitable the business is,
- high net profit margin is attractive to shareholders as it may indicate high dividends

Question 13

what are the uses of profit margins

Answer 13

• can be compared to previous years to better understand business performance
• all three profit margins should be considered
• profit margins can also be compared to other businesses

Question 14

what are the 4 ways to improve profitablibity

Answer 14

1 increase prices (may not work for elastic products)
2 reduce variable costs
3 reduce expenses
4 reduce one-off costs

Question 15

how could a business reduce variable costs

Answer 15

• change packaging
• buy in bulk EOS
• buy cheaper stock
• seek new suppliers

Question 16

how could a business reduce expenses

Answer 16

• seek new suppliers
• reduce staffing
• replace inefficient fixed assets
• relocate

Question 17

how could a business reduce one-off costs

Answer 17

• implement zero-based budgets
• lease assets