Profit 2.3.1 Flashcards
what is profit
the difference between a business’ revenue and the costs generated by the business in a set period of time
what is profitability
the efficiency with which a business is able to make profits
how to calculate profit
total sales - total costs
how to calculate gross profit
revenue - cost of sales (VC)
how to calculate operating profit
gross profit - expenses (overheads/FC)
how to calculate net profit
operating profit - tax - finance costs
what do profitability ratios provide a useful insight into
- if the business is making a profit
- how efficient is the business at turning revenue into profit
- is the profit enough to justify investment
how to calculate gross profit margin
gross profit/revenue * 100
how to calculate operating profit margin
operating profit / revenue *100
what does the operating profit margin tell business’
- how effectively it turns sales into profits
- how efficiently the business runs
give 4 simple ways to increase profit
- increase the quantity of products sold
- increase selling price
- reduce VC per unit
- reduce fixed costs
why would increasing the quantity sold improve profit (also give 1 drawback)
higher sales volume = higher sales which results in more profit, alongside a higher market share (depending on the elasticity of demand)
however, competitors are likely to respond and that would result in more need for advertising, something that would increase fixed costs
why would increasing the selling price improve profit (also give 1 drawback)
you will get more profit per purchase and customers may perceive the product as high quality, so buy more
however, competitors will likely respond by lowering prices, and then customers may switch if they are unloyal
why would reducing VC per unti improve profit (also give 1 drawback)
it would increase the value added per unit sold and the profit margin on each item
however, if suppliers cannot be persuaded to lower prices, so the quality drops, customers may notice and buy from competitors
why would reducing fixed costs improve profit (also give 1 drawback)
lower fixed costs directly results in higher profits because it reduces the breakeven output (costs cuts may affect quality and number of employees)
however, worker morale may be lower, alongside the quality, which reduces customer service and productivity
give 2 more complex ways to increase profit
- reduce product range
- outsource non-essential tasks
