2.3 Measuring and increasing profits
- Created by: Millie
- Created on: 17-02-14 13:01
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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
- However if price inelastic, demand should not change because of price
- Higher prices may cause demand to fall
- Lowering costs
- Cheaper suppliers, more raw materials for less
- May have an impact on quality
- Cheaper labour costs e.g. overseas
- May have an impact on quality
- Cheaper labour costs e.g. overseas
- Reducing waste by buying newer machinery, long term benefit
- Cheaper suppliers, more raw materials for less
- Raising prices
- 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)
- Net Profit Margin
- Definitions
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