Measuring and Increasing Profit

AS Business Studies

Aims & Objectives

Aim:• Understand ways of measuring profit.Objectives:• Define gross profit, net profit & ROCE• Calculate gross profit, net profit & ROCE• Analyse gross profit, net profit & ROCE

Starter

• What is the formula for calculating profit?

• How can profit be improved?

Profit

• Profit = Total Revenue – Total Costs Methods of Increasing Profits• Increasing no. of units sold with same price and cost

per unit• Increase profit made on each unit by increasing

selling price per unit or reducing cost per unit

Gross Profit & Net Profit

• Gross Profit = Sales Revenue – Variable Costs

• Net Profit = Sales Revenue – Total Costs (FC+VC)

• If gross profit increases and there is no increase in fixed costs then net profit will increase too!

Profit Margins

• The profit made as a proportion of sales revenue• Sales = £100• Profit =£30• Profit Margin is 30%

Sales £100Profit £30

Gross Profit Margin

• Shows percentage of sales that is gross profit.

• Gross Profit Margin (%) = (Gross Profit / Sales) x100

• Eg. (£150,000/£250,000) x 100 = 67%

• For every £1 of sales 67p is gross profit.

Net Profit Margin

• Shows percentage of sales that is net profit

• Net Profit Margin (%) = (Net Profit / Sales) x100

• Eg. (£70,000/£250,000) x 100 = 28%

• For every £1 of sales 23p is net profit.

Worksheet

Question 1)• A T-shirt retailer, T-Design, sells 50,000 units in 1

year at £5 each. Each T-shirt is purchased by the shop for £2.00 each. Annual fixed costs are £80,000.

Calculate:• Gross Profit

• Net Profit

Worksheet

Question 2)• The following year the shop again sells 50,000 units

for £5 each but gross profit increases to £160,000 and net profit to £90,000.

Calculate the new:• Gross Profit Margin

• Net Profit Margin

Measuring Profitability - ROCE

• Compare profit made with the value of capital invested – Return on Capital Employed

• ROCE (%) = (Net Profit/Capital Invested) x 100

• E.g. (4,000/12,000) x 100 = 33.3%

• For every £1 invested, 33.3p is net profit

ROCE• The higher the percentage the more profitable the

investment.• Indicates the efficiency of the management in managing the

investment.• Can be compared between projects or businesses.

• ROCE can be increased by:– Increasing profit without investing any more capital– Make the same level of profit but with less capital expenditure

WorksheetQuestion 1)• Winston is an entrepreneur looking to start up a sports

shop. Winston plans to invest £12,000 in the new business. He has budgeted net profit of £3,000 for the first year of operation.

Calculate:• The expected return on capital. • What does this mean?• Why should Winston be worried if another similar

business is making a return on capital of 20% each year?

Worksheet

In year 2 Winston plans to invest a further £11,400 in the sports shop. He has budgeted profit of £3,800 for the second year of operation.

Calculate:• Return on capital employed for year 2• How does this ROCE figure compare to year 1?• What factors may have contributed to the

change in the ROCE figure?

Plenary

Give the equations for the following:

• Gross Profit• Net Profit• ROCE