Measuring and Increasing Profit AS Business Studies

Aims & Objectives Aim: Understand ways of increasing profits. Objectives: Explain gross profit, net profit & ROCE Evaluate methods of increasing profitability

Starter What is the formula for calculating: – Net profit margin – Gross profit margin – ROCE Explain what a net profit margin of 37% means Explain what a ROCE of 28% means.

Carousel Activity Methods of Increasing Profits Increase sales without reducing Net Profit Margin Increase Net Profit Margin by reducing variable costs Increase net profit margin by increasing price Increase net profit margin by reducing fixed costs Limitations of Each Method – may wish to consider methods!

Increase Sales Without Reducing NPM Develop New Products Expensive to develop No guarantee of success Increase Promotion Adds to fixed costs Competitors may increase promotion too! Selling Products in New Markets Culture and tastes may be different Can be expensive to penetrate

Increase Net Profit Margin by Reducing Variable Costs Use cheaper materials Reputation of quality may be lost Consumers may expect lower prices – lowering margins Cut Labour Costs Quality may be at risk Demotivate workforce Cut Costs by Capitalisation Purchasing machinery – expensive in SR Need for re- training – costs increase

Increase Net Profit Margin by Increasing Price Raising Price of Product Total profit could fall if consumers switch to competitors Loss of loyal customers? Increase Net Profit Margin by Reducing Fixed Costs Cutting Fixed Costs such as Rent Could damage image if move location Cutting promotion could cut sales by more than fixed costs

Tesco & Sainsbury’s Case Study

Explain the term net profit margin Calculate the NPM for both companies for 2006 & Give two possible actions Sainsbury’s managers could take to improve profitability. What limitations may exist for the methods you have suggested?

Exam Practice Net profit margin question 1 June 2011 (3 Marks) Net profit margin question January 2010 question 2a (6 Marks) Net profit margin question June 2009 question 1a (4 Marks)