Presentation on theme: "Measuring and Increasing Profit"— Presentation transcript:
1 Measuring and Increasing Profit AS Business Studies
2 Aims & Objectives Aim: Understand ways of measuring profit. Define gross profit, net profit & ROCECalculate gross profit, net profit & ROCEAnalyse gross profit, net profit & ROCE
3 Starter What is the formula for calculating profit? How can profit be improved?
4 Profit Profit = Total Revenue – Total Costs Methods of Increasing ProfitsIncreasing no. of units sold with same price and cost per unitIncrease profit made on each unit by increasing selling price per unit or reducing cost per unit
5 Gross Profit & Net Profit Gross Profit = Sales Revenue – Variable CostsNet 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!
6 Profit Margins Sales £100 Profit £30 The profit made as a proportion of sales revenueSales = £100Profit =£30Profit Margin is 30%
7 Gross Profit Margin Shows percentage of sales that is gross profit. Gross Profit Margin (%) = (Gross Profit / Sales) x100Eg. (£150,000/£250,000) x 100 = 67%For every £1 of sales 67p is gross profit.
8 Net Profit Margin Shows percentage of sales that is net profit Net Profit Margin (%) = (Net Profit / Sales) x100Eg. (£70,000/£250,000) x 100 = 28%For every £1 of sales 23p is net profit.
9 WorksheetQuestion 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 ProfitNet Profit
10 WorksheetQuestion 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 MarginNet Profit Margin
11 Measuring Profitability - ROCE Compare profit made with the value of capital invested – Return on Capital EmployedROCE (%) = (Net Profit/Capital Invested) x 100E.g. (4,000/12,000) x 100 = 33.3%For every £1 invested, 33.3p is net profit
12 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 capitalMake the same level of profit but with less capital expenditure
13 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?
14 WorksheetIn 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 2How does this ROCE figure compare to year 1?What factors may have contributed to the change in the ROCE figure?
15 Plenary Give the equations for the following: Gross Profit Net Profit ROCE