2.3.1 : Profit Flashcards
(21 cards)
What is profit ?
Profit is the reward or return for taking risks & making investments
What is administration expenses ?
Operating costs and expenses that are not directly related to producing the goods or services are recorded
here Includes distribution costs (e.g. marketing, transport) and the wide range of administrative expenses or
overheads that a business incurs
What is operating profit?
A key measure of profit. Operating profit records how much profit has been made in total from the trading
activities of the business before account is taken of how the business is financed
What does operating profit tell us about a business ?
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
Why do businesses increase quantity sold ?
Higher sales volumes = higher sales, assuming that the selling price is not lowered
❑ Makes better use of production capacity (i.e. fixed costs should not rise)
❑ May result in higher market share
Will increasing the quantity sold work for a business ?
❑ Depends on elasticity of demand
❑ Sales value may actually fall if price has to be reduced to achieve higher sales volumes
❑ Does business have capacity to sell more?
Why might increasing the quantity sold not work for a business ?
❑ Competitors are likely to respond
❑ Marketing efforts may fail – e.g. promotional campaign does not generate results
❑ Fixed costs might actually rise – e.g. higher marketing
Why do businesses increase selling price ?
❑ Higher selling price = higher sales (assuming quantity sold does not fall in response)
❑ Maximises value extracted from customers
❑ Customers may perceive product as higher quality
❑ No need for extra production capacity
Why will increasing selling price work for a business ?
❑ Depends on price elasticity of demand
❑ Sales value may actually fall price rise is matched by an even bigger fall in quantity sold
❑ It will work if customers remain loyal and still perceive product to be good value
Why might increasing selling price not work for a business ?
❑ Competitors are likely to respond (e.g. prices lower)
❑ Customers may decide to switch to competit
Why do businesses decrease variable cots per unit ?
❑ Increase the value added per unit sold
❑ Higher profit margin on each item produced and sold
❑ Customers do not notice a change in price
Why will decreasing variable costs per unit work for a business ?
❑ Yes, if suppliers can be persuaded to offer better prices
❑ Yes, if quality can be improved through lower wastage
❑ Yes, if operations can be organised more efficiently
Why might decreasing variable costs per unit not work for a business ?
❑ Lower input costs might mean lower quality inputs – which can lead to greater wastage
❑ Customers may notice a decrease in product quality
Why do business increase production output ?
❑ Provides greater quantity of product to be sold
❑ Enables business to maximise share of market demand
❑ Spreads fixed costs over a greater number of units
Why will increasing production output work for a business ?
❑ Yes, if the extra output can be sold (e.g. finding a new market, offering a lower price for a more basic product)
❑ Yes, if the business has spare capacity
Why might increasing production output not work for a business ?
❑ A dangerous option – what if the demand is not there?
❑ Fixed costs might actually rise (e.g. stepped fixed costs)
❑ Production quality might be compromised (lowered) in the rush to produce more
Why do businesses reduced fixed costs ?
❑ A drop in fixed costs translates directly into higher profits
❑ Reduces the break-even output
❑ Often substantial savings to be made by cutting unnecessary overheads
Why will reducing fixed costs work for a business ?
❑ Yes, provided costs cut don’t affect quality, customer service or output
❑ A business can nearly always find savings in overheads
Why might reducing fixed costs not work for a business ?
❑ Might reduce ability of business to increase sales
❑ Intangible costs – e.g. lower morale after making redundancies
What are some other ways to improve profit ?
Reduce product range
Outsource non-essential functions
What is the difference between profit and cash flow ?
