2.4.1 Business calculations

Total revenue

Selling price × quantity sold

Total costs

Fixed costs + variable costs

Profit

Total revenue − total costs

Sales revenue (from statement)

Total income from sales

Cost of sales

variable costs of producing goods

Gross profit

Sales revenue − cost of sales

Expenses/overheads

Fixed costs (e.g. rent, wages)

Net profit

Gross profit − fixed costs

Gross profit margin (%)

(Gross profit ÷ Sales revenue) × 100

Gross profit margin meaning

Shows how well a business controls cost of sales (variable costs)

High gross profit margin

Better profitability / efficient production

Low gross profit margin

Poor control of cost of sales

Net profit margin (%)

(Net profit ÷ Sales revenue) × 100

Net profit margin meaning

Shows overall profitability after all costs

High net profit margin

Good control of total costs (fixed + variable)

Low net profit margin

High expenses or poor cost control

Why margins are useful

Compare performance over time or with other firms

Limitation of margins

Need more than one year of data for trends

Another limitation

Must compare with similar businesses for meaning

average rates of return

(average annual profit ÷ cost of investment) x 100

average annual profit

total profit ÷ number of years