2.3.1 Profit

• profitability - how efficient a business is at generating profits

  Factors affecting profitability:

  • unit costs of the product
  • sales revenue
  • fixed costs
• Gross profit - the profits made once the firm's direct costs have been paid

  • gross profit = total revenue - cost of sales
  • gross profit margin(%) = (gross profit / sale revenue) x 100
• Operating profit - profits made directly from trading activities, excluding finance costs and tax

  • operating profit = gross profit - other operating expenses
  • operating profit margin(%) = (operating profit / sales revenue) x 100
• Profit for the year / net profit - profit after all expenses for the year have been paid

  • net profit = operating profit - interest
  • net profit margin(%) = (net profit / sales revenue ) x 100