Profit, profit margins and ARR

Overview

Gross and net profit, cost of sales, gross and net profit margins, the average rate of return with worked calculations, and what the figures tell a business.

What you need to know

Answer each one before you reveal it.

Questions from this subtopic

Each one with the model answer underneath.

1. 1

   What is gross profit, and how is it calculated?

   Model answer

   Gross profit is the profit left once the direct cost of the goods sold is taken away. Gross profit = sales revenue − cost of sales.

2. 2

   What is cost of sales?

   Model answer

   Cost of sales is the direct cost of buying or making the goods a business has sold. For a shop, cost of sales is what it paid for the stock it sold.

3. 3

   A shop has sales revenue of £120,000 and cost of sales of £72,000. What is its gross profit?

   Model answer

   The shop's gross profit is £48,000. £120,000 − £72,000 = £48,000.

4. 4

   What is net profit, and how is it calculated?

   Model answer

   Net profit is the profit left after every cost, including operating expenses and interest, has been deducted. Net profit = gross profit − operating expenses − interest.

5. 5

   A shop has gross profit of £48,000, operating expenses of £30,000 and interest of £3,000. What is its net profit?

   Model answer

   The shop's net profit is £15,000. £48,000 − £30,000 − £3,000 = £15,000.

6. 6

   What does the gross profit margin measure, and how is it calculated?

   Model answer

   The gross profit margin shows the percentage of sales revenue left after cost of sales. Gross profit margin (%) = gross profit ÷ sales revenue × 100.

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