AQA A2 BusinessIMPROVING PROFITABILITY 1

Teaser

A Business Ltd sells Boots. It sells 30,000 boots per year at £7 each.

Each pair of boots is purchased by the shop at £3 each. Annual Fixed Costs are £50,000.

Calculate a) Gross Profit and b) Net Profit

Lesson Objectives

1. To be able to define the term profit margin (KNOWLEDGE)

2. To be able to calculate the profitability of a given business (APPLICATION)

3. To be able to provide advice on the most appropriate action for a business to improve profitability. (ANALYSIS/INSIGHT)

Definition

The Profit Margin of a business may be defined as the profit made on a product as a proportion of sales revenue.

Mathematically this may be expressed as :

NET PROFIT→ Sales- Cost of sales- Expenses

SALES → Money made from selling products

What are Cost of Sales?

Cost of Sales are the costs which are incurred in making a product available for sales. In general, it is the cost of stock.

The Cost of Sales figure is calculated as :

Opening Stock + Purchases (of stock) – Closing Stock

When considering business strategy, stock has become an ever important factor in the profit equation.

Activity 1

Pablo supplies the following information for the year ended 28th February 2013

Stock at 1 March 2012 £211, Stock at 28 February 2013 £485, Purchases £27,665, Sales £74,882, Wages £32,559, Motor Expenses £11,456, Rates £674, General Expenses £5,391

Prepare a Trading Account and a Profit and Loss Account for the Year Ended 28th February 2013.

How can the profit margin be improved?

Because Profit = Total Revenue – Total Costs

The profit margin can be increased in the following ways

1. Increase the price of the product

2. Reduce the costs of the product

3. A Combination of 1. and 2.

What would be the disadvantages of using option 1 and option 2.

DISADVANTAGES EXPLAINED

1. Where prices are increased, there is a danger of losing customers. The likelihood of this will depend on

- the product

-the economy

2. The simplicity with which costs may be reduced will depend upon the size of the business and its relative power with suppliers.

Activity 2.

The results for two businesses for two years are as follows: Calculate the Net Profit Margin for both companies for both years

2012 £ 2013 £

Sales – Food Supermarket

20,000,000 25,000,000

Sales – Corner garage 2,000,000 1,500,000

Net Profit – Food Supermarket

5,000,000 8,000,000

Net profit – Corner garage

700,000 500,000

Activity 2 Continued

2. Which company displays the best profitability?

3. Which company is most likely to be able to use Option 1 most successfully and why.

4. Which company is most likely to be able to use Option 2 most successfully and why.

When considering the advice you give…

It is important to consider the industry in which the business is operating in. The type of business will:

- Dictate the strength of the advice that you provide (HOW APPROPRIATE)

A good example of this is the current race for businesses to produce exclusive Apps. This is recognition of the strength of the technology market.

Other Niche Markets

Health Products

Gym classes

Smart Phones (Cameras with bigger memories)

What are the advantages and disadvantages of operating in these markets.

Exam Question

Exam Question Practice.

Income Statement 2012

£000 Revenue (Turnover) 200 000

Cost of sales 106 103

Gross profit 93 897

Operating profit 40 456