Business Calculations (Edexcel GCSE Business)
Revision Note
Profit Calculations
Profit is the reward for the risk that entrepreneurs take in proving a product/service
The two main types of profit are gross profit and net profit
Gross profit takes into account the expenses directly incurred in the cost of production and is calculated as follows
Gross profit = Sales revenue - cost of sales
Net profit takes into account all of the business expenses and is calculated as follows
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 2/5ths of the selling price, with monthly fixed costs being £82,000. It sells 2,200 scooters a month.
The business pays £240 interest on a mortgage each month. This year it purchased the patent for a new type of rechargeable battery for £17,000.
Calculate the businesses net profit for the year. (6 marks)
Step 1: Calculate the Gross Profit (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 month (gross profit per unit x units sold)
£108 x 2,200 = £237,600
Calculate the gross profit per year (gross profit per month x 12)
£237,600 x 12 = £2,851,200 (1 mark)
Step 2: Calculate the annual fixed costs
(1 mark)
Step 3: Calculate the annual Interest
(1 mark)
Step 4: Calculate the net profit using the formula
(1 mark or 6 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, operating 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
Gross profit margin shows the proportion of revenue left over after the business has paid for its costs of sales
A business that adds a lot of value would be expected to have a high gross profit margin
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 revenue that is turned into net profit before tax and is expressed as a percentage
It is calculated using the formula
Net profit margin is the proportion of revenue left over after the business has paid all of its costs
A business such as Tesco would have a low net profit margin due to the competitiveness of the grocery market
However if sales are high, this could still generate significant total profits
A business with high net profit margins may have low total profits if sales are low
Worked Example
Head to Toe Wellbeing’s revenue in 2022 was £124,653. Its 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
The Average Rate of Return (ARR)
The average rate of return (ARR) measures the profit from a proposed capital project
ARR is used when a decision is required about which of two projects should be pursued in order to generate the most profit
E.g. A business may calculate the ARR of extending a factory and compare this with the ARR of purchasing new machinery
They can then make a judgement about which project they should go ahead with
The average rate of return is expressed as a percentage and is calculated using the formula
Worked Example
The table below contains information about a new piece of machinery that a business wants to buy
Average annual profit | £200,000 |
---|---|
Cost of the machinery | £475,000 |
Calculate the average rate of return, You are advised to show your workings. (2)
Step 1: Insert the values into the formula
(1 mark)
Step 2: Multiply by 100 to get a percentage
ARR = 0.42 x 100
ARR = 42% (1 mark)
The Advantages & Disadvantages of Using the Average Rate of Return (ARR)
Advantages | Disadvantages |
---|---|
|
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Sales Revenue Calculations
Sales volume is the number of products sold i.e the physical number of units sold
Sales revenue = price x quantity sold i.e the financial value of the units sold
The market share that a business enjoys is the proportion of the total sales revnue of a product/service compared to the market as a whole e.g. Tesco has 26% of the UK grocery market
Market Share can be calculated as follows
If a business sells multiple items, the percentage that each item contributes to its overall sales revenue can be calculated using the following formula
Worked Example
In 2019 a business sold three products, X, Y and Z. Table 1 shows the sales revenue generated for each of these products.
Table 1
Product | Contribution to Sales Revenue (£'s) |
---|---|
X | 300,000 |
Y | 100,000 |
Z | 600,000 |
Using the information in Table 1, calculate, to 2 decimal places, the percentage of total sales revenue made by product X in 2019. You are advised to show your workings. (2)
Step 1: Identify annual sales of product x in 2019
£300,000
Step 2: Substitute figures into the formula
Step 3: Present the answer to two decimal places
30.00 %
1 mark for knowledge of the formula and 1 mark for correct working
Full marks for the correct answer
Worked Example
Table 2 contains information about the price of a Toyota Rav 4 car between 2016 and 2018.
Year | Price (£'s) |
---|---|
2016 | 32,000 |
2017 | 29,000 |
2018 | 26,500 |
(a) Using the information in Table 2, calculate, the percentage reduction in the price of a Toyota Rav 4 car between 2016 and 2018. (2)
Step 1: Remember this formula to calculate a percentage change
Step 2: Substitute figures into the formula
Step 3: Present the answer to two decimal places
- 17,12 %
The price has fallen by 17.12% (2 marks for the correct answer)
(b) Using the information in Table 2, calculate the average price of a Toyota Rav 4 car over the three year period between 2016 and 2018. (2)
Step 1: Insert values into an average formula
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