measuring and increasing profit as business studies
TRANSCRIPT
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