1.6.3 Profit and loss Flashcards
What are the 3 different types of profit?
Gross profit, operating profit and profit for the year.
How is gross profit calculated?
Revenue - cost of sales.
These are the cost of sales directly linked to producing the good/service.
Gross profit calculates the value added to the good or service produced.
What are operating profits?
These are any profits left over after any other expenses have been dedecuted such as adminstritave costs.
Costs which are not directly linked to the production of a good/service.
How are operating profits calculated?
Gross profit - other operating expenses.
What is profit for the year?
and calculation
Also known as net profit, this is the final level of profit.
This is calculated by operating profits - interest.
Any interest a business owes creditors is paid off leaving value of net profit.
What is profitability?
This looks at how a business can turn its revenue into profits and how much sales revenue represents profits.
It is looked in terms of ratios: gross profit margin, operating profit margin and profit for the year margin. These can help a business forecast how many sales they’ll make and what type of profit margins to expect.
How is Gross profit margin calculated?
(Gross profit / revenue) x 100
How is operating profit margin calculated?
(Operating profit / revenue) x 100
How is net profit margin calculated?
or profit for they year margin
(Net profit / revenue) x 100
How can a business increase their profitability?
Sell the same but at a higher price, could lead to a fall in demand depends on PED.
Sell more at the current price, this measn new customers will need to be found perhaps by increasing advertising. Could increase costs however and reduce profit margins if rise in costs > revenue gained from advertising.
Sell at same price but reduce costs, could create an opportunit costs as reduce costs is at the cost of reduced quality goods. Consumers may be unhappy and reduce demand from this and brand image becomes tarnsihed.
