Profit Calculations
- Profit is the money left over after all costs have been accounted for
- There are several different types of profit
Types of Profit
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Gross Profit (GP) |
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GP = Revenue - cost of sales |
Operating Profit (OP) |
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OP = Gross Profit - Operating Expenses |
Net Profit (NP) |
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NP = Operating Profit - (Net Interest + Exceptional Costs) |
Worked example
An e-scooter manufacturer sells its products to retailers for £180 per unit. Variable costs are ⅖ 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. (5 marks)
Step 1: Calculate the Gross Profit (Revenue - Cost of Sales)
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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)
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Step 2: Calculate the Operating Profit (Gross profit - Operating Expenses)
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Multiply the monthly fixed costs by 12 (months)
£82,000 x 12 = £984,000 -
Subtract the annual fixed costs from the annual gross profit
£2,851,200 - £984,000 = £1,867,200 (1 mark)
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Step 3: Calculate the Net Profit (Operating Profit - Net Interest + Exceptional Costs)
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Multiple the monthly interest by 12 (months)
£240 x 12 = £2,880 -
Add the one-off purchase to the annual interest
£17,000 + £2,880 = £19,880 -
Subtract the interest and one-off costs from the operating profit
£1,867,200 - £19,880
Net profit for the year = £1,847,320 (5 marks for the correct answer)
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Exam Tip
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.