Topic 18 - Measuring / Increasing Profit

Question 1

What is return on capital?

Answer 1

Comparing profit with the value of initial capital invested, as a percentage.

Formula: net profit / capital invested X100

Question 2

Why measure profitability?

Answer 2

Shows how good the investment has been and how efficient the management of the firm has been.

Question 3

What is a profit margin?

Answer 3

Profit made as a %age of sales revenue.

formula: net profit / sales revenue X100

Question 4

Examples and limitations of increasing sales as a method of increasing profit

Answer 4

Examples: new products or increase promotion

Limitations: expensive, time consuming, possibly unsuccessful

Question 5

Examples and limitations of increasing price as a method of increasing profitability

Answer 5

Examples: price raise without cost increases

Limitations: could decrease market share, brand image may suffer

Question 6

Examples and limitations of reducing variable costs as a method of increasing profitability

Answer 6

Examples: cheaper inputs / cheaper labour costs through automation or a new country to exploit.

Limitations: affects quality, automation means training costs, relocation means poor communication.

Question 7

Examples and limitations of reducing fixed costs as a method of increasing profitability.

Answer 7

Examples: cut rent or promotion or management costs.

Limitations: low rent could mean a poor location. Low ads could mean lower profit. Less management could mean less efficiency.