2.3 Measuring and increasing profits

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  • 2.3 Measuring and increasing profitability
    • Definitions
      • Profit- the difference between the income of a business and its total costs
      • Profitability- the ability of business to generate profit or the efficiency of a business in generating profit
      • Net Profit Margin- compares the profit made with sales income of the business
      • Return on capital- compares the profit made with the capital invested
    • Methods of increasing profit
      • Raising prices
        • Higher prices = more revenue for each unit sold
        • May have an effect on demand
          • Higher prices may cause demand to fall
            • However if price inelastic, demand should not change because of price
              • Price inelastic-the demand for a product changes relatively less than the change in price
      • Lowering costs
        • Cheaper suppliers, more raw materials for less
          • May have an impact on quality
            • Cheaper labour costs e.g. overseas
        • Cheaper labour costs e.g. overseas
        • Reducing waste by buying newer machinery, long term benefit
    • Methods of measuring profitability
      • Net Profit Margin
        • NPM = net profit before tax / sales income ( X100)
      • Return on capital employed
        • ROCE = net profit before tax / capital invested (X100)

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