# Measuring and Increasing Profit

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Measuring and Increasing Profit

Aims & Objectives Aim: Understand ways of measuring profit.
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 Sales £100 Profit £30
The profit made as a proportion of sales revenue Sales = £100 Profit =£30 Profit Margin is 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

Worksheet Question 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