Profits & Profit Margins (Edexcel GCSE Business)
Revision Note
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) |
| Gross Profit = Revenue - cost of sales |
Net Profit (NP) |
| 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)
Calculate the variable cost per unit
⅖ of £180 = £72 (1 mark)Calculate the gross profit per unit (selling price - variable cost per unit)
£180 - £72 = £108 (1 mark)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))
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 Tips and Tricks
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
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
(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
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
(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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