Profit Flashcards
What is profit?
Difference between total revenue and total costs
What is gross profit?
Revenue- cost of sales
What is gross profit margin?
Gross profit/ revenue x 100
What is operating profit?
What is left after all the costs of a business have been taken from its revenues
What is operating profit margin?
Operating profit/ total revenue x100
Why is operating profit margin a useful ratio?
Tells us:
- how effectively a business turns its sales into profit
- how efficiently a business is run
- whether a business is able to “add value” during the production process
How to improve profit
- Increase quantity sold
- increase selling price
- reduce VC per unit
- increase output
- reduce fixed costs
Why increase the quantity sold?
Higher sales volumes = higher sales, assuming that the selling price is not lowered
Makes better use of production capacity
May result in higher market share
Why increase selling prices?
Higher selling price= higher sales
Maximises value extracted from customers
Customers may perceive product as higher quality
No need for extra production capacity
