5.5 Evaluating Profitability Flashcards
How to calculate the gross profit margin
gross profit/sales
What does the gross profit mean
how much gross profit is earned for every $1 sales
Is the gross profit margin better or is the gross profit a better measure of company’s profitability
gross profit margin!! shows relation of gross profit to sales!!
gross profit basically is a $ value-> can be ambiguous
higher gross profit better? oro lower?
HIGHER!!!!! HIGHER PERCENT= means more profit earned on the sales
Profit margin
measures the % of each dollar of sales that actually represents profit!!
Net Income/sales
What is the profit margin used to measure
How mcuh more the selling price is then ALL EXPENSES!!!!
how is net income related to gross profit?
Remember:
Sales- COGS= Gross Profit
Gross Profit- Operating Exepnses= Income b4 tax
Income b4 Tax- Income tax expense= Net Income
What does gross profit margin measure?
how much the selling price exceeds COGS
What does the profit margin measure?
how much the selling price covers all expenses including COGS + operating expenses
How can a company increase profit margin
LOGIC: decrease cogs, decrease operating eexepenses (INCREASE THE GROSS PROFIT)
ANSWER: increase the gross profit margin!!1
IS A HIGHER PROFIT MARGIN BETTEr?
yes! duh!!
means more net income for every $ of sales
