GCSEBusinessEdexcelRevision Notes1. Investigating Small Business1.3 Putting a Business Idea into PracticeProfits & Profit Margins

Profits & Profit Margins (Edexcel GCSE Business)

Revision Note

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Lisa Eades

Written by: Lisa Eades

Reviewed by: Steve Vorster

Types of Profit

  • Profit is the money left over after all costs have been accounted for

  • If the costs are greater than the sales revenue, then the firm is making a loss

  • There are two different types of profit

Types of Profit

Type of Profit

What does it show?

How is it Calculated?

Gross Profit

(GP)

  • The difference between sales revenue and the costs directly related to production

Gross Profit = Revenue - cost of sales

Net Profit

(NP)

  • The difference between the gross profit and other operating expenses and any Interest

Net Profit = gross profit - (operating expenses + interest)

Worked Example

An e-scooter manufacturer sells its products to retailers for £180 per unit. Variable costs are ⅖ of the selling price, with annual  fixed costs being £820,000. The business also pays interest of £2,600 per year on its bank loans. It sells 26,400 scooters a year. 

Calculate
(a) Gross profit for the year. (3 marks)

(b) Net profit for the year. (2 marks)

You are advised to show your workings.
  

Step 1: Calculate the Gross Profit (Sales revenue - cost of sales)

  1. Calculate the variable cost per unit
    ⅖ of £180           =           £72                   (1 mark)

  2. Calculate the gross profit per unit (selling price - variable cost per unit)
    £180 - £72          =           £108                 (1 mark)

  3. Calculate the gross profit per year (gross profit per unit x units sold)
    £108 x 26,400       =          £2,851,200        (3 marks for the correct answer)
     

Step 2: Calculate the Net Profit (Gross profit - (Operating Expenses + interest))

  1. Substitute the values into the formula

    £2,851,200 - (£820,000 + £2,600)    =      £2,028,600       

    (1 mark for partially correct substitution into formula; 2 marks for the correct answer)

Examiner Tip

You may not be asked to complete all of these calculations in one question. The question may, for example, provide the Gross Profit and some other information and then ask you to calculate the net profit. Look at the data carefully to ensure you are doing the correct calculation.

Profit Margins

  • A profit margin is the amount by which sales revenue exceeds the costs

    • Profit margins can be calculated for each type of profit (gross and net profit)

  • Profit margins can be compared to previous years to better understand business performance

    • Higher and increasing profit margins are preferable, as it means that more revenue is being converted to profit

Gross Profit Margin 

  • This shows the proportion of revenue that is turned into gross profit and is expressed as a percentage

    • It is calculated using the formula

 fraction numerator Gross space Profit over denominator Sales space revenue end fraction cross times space 100 space space space space space space

Worked Example

Head to Toe Wellbeing’s revenue in 2022 was £124,653. Its gross profit was £105,731.

Calculate Head to Toe Wellbeing Ltd’s Gross Profit Margin in 2022. (2)


Step 1: Substitute the values into the formula

      fraction numerator Gross space Profit space over denominator Sales space revenue end fraction space cross times space 100 space space space equals space fraction numerator £ 105 comma 731 over denominator space £ 124 comma 653 space end fraction equals space space 0.8482 space space            (1 mark)

Step 2: Multiply the outcome by 100 to find the percentage

   0.8482 x 100

    = 84.82%                   (1 mark)

84.82% of Head to Toe Wellbeing’s revenue was converted into gross profit during 2022

Net Profit Margin

  • The net profit margin shows the proportion of sales revenue that is turned into net profit and is expressed as a percentage

  • It is calculated using the formula

fraction numerator Net space Profit over denominator Sales space revenue end fraction cross times 100

Worked Example

Head to Toe Wellbeing’s revenue in 2022 was £124,653. Its net profit for the year was £57,596.

Calculate Head to Toe Wellbeing Ltd’s Net Profit Margin in 2022. (2)

Step 1: Substitute the values into the formula

fraction numerator Net space Profit space over denominator Sales space revenue end fraction cross times 100 equals space fraction numerator £ 57 comma 596 over denominator £ 124 comma 653 space end fraction equals space 0.4621        (1 mark)

Step 2 - Multiply the outcome by 100 to find the percentage

0.4621 x 100

= 46.21%             (1 mark)

46.21% of Head to Toe Wellbeing’s revenue was converted into profit for the year

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    Lisa Eades

    Author: Lisa Eades

    Expertise: Business Content Creator

    Lisa has taught A Level, GCSE, BTEC and IBDP Business for over 20 years and is a senior Examiner for Edexcel. Lisa has been a successful Head of Department in Kent and has offered private Business tuition to students across the UK. Lisa loves to create imaginative and accessible resources which engage learners and build their passion for the subject.

    Steve Vorster

    Author: Steve Vorster

    Expertise: Economics & Business Subject Lead

    Steve has taught A Level, GCSE, IGCSE Business and Economics - as well as IBDP Economics and Business Management. He is an IBDP Examiner and IGCSE textbook author. His students regularly achieve 90-100% in their final exams. Steve has been the Assistant Head of Sixth Form for a school in Devon, and Head of Economics at the world's largest International school in Singapore. He loves to create resources which speed up student learning and are easily accessible by all.