2.4.1 Business Calculations

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  • Created by: AbigaillB
  • Created on: 02-01-21 15:52
Gross Profit (GP)
1. definition
2. calculation
1. Gross profit is a good benchmark between products, so a business can calculate which products make the better profit.

2. Sales Revenue - Variable Costs
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Net Profit (NP)
1. definition
2. calculation
1. Businesses can calculate their net profit by taking their sales revenue figure and deducing all fixed and variable costs associated with selling the product or providing the service.

2. Sales Revenue - (Fixed Costs + Variable Costs)
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Gross Profit Margin (GPM)
1. definition
2. calculation
1. This calculation is a percentage. It tells the business how profitable it is and if it is performing well. The GPM percentage needs to be compared.

2. Gross Profit / Sales Revenue x 100
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Net Profit Margin (NPM)
Net Profit / Sales Revenue x 100
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Average Rate of Return (ARR)
1. definition
2. calculation
1. A business may have to decide between two projects, it cannot do both so will need to know which one will be the most profitable. The business will calculate the ARR of both projects and compare them. The project with the best result will go ahead.

2
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How to Calculate ARR
(3 step method)
1. Add number of years and divide by number of years ( e.g. 12 + 14 + 12 / 3 )

2. Subtract ICO and divide by ICO

3. Multiply by 100
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1. Sales Revenue

2. Total Costs (outflows)
1. price x quantity

2. variable costs + fixed costs
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Fixed cost (a) definition and (b) examples
(a) set amount/always have to pay and don't vary with output
(b) rent, utility bills, salaries, subscription, internet
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Variable Costs (a) definition and (b) examples
(a) vary with output
(b) wages, raw materials, selling (returns and delivery), packaging, process fees for internet
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QUESTIONS
1. Gross Profit when SR is £350 and VC is £125
2. GPM when Sales of £5000, VC of £2000 and FC of £750
1. £350 - £125 = £225
2. (5000-2000) / 5000 x 100 = 60%
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QUESTIONS
1. Net Profit when SR is £350, VC £125, FC is £50
2. NPM when Sales £5000, VC £2000 and FC of £750
1. 350 - (125 + 50) = £175
2. (5000 - (2000 + 750) ) / 5000 x 100 = 45%
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QUESTIONS
ARR when initial investment is -£80,000
Year - 1 £10,000 2 £35,000 3 £45,000 4 £38,000
10,000 + 35,000 + 45,000 + 38,000 = 32,000

32,000 - 80,000 / 80,000 x 100 = 60% negative investment
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Other cards in this set

Card 2

Front

1. Businesses can calculate their net profit by taking their sales revenue figure and deducing all fixed and variable costs associated with selling the product or providing the service.

2. Sales Revenue - (Fixed Costs + Variable Costs)

Back

Net Profit (NP)
1. definition
2. calculation

Card 3

Front

1. This calculation is a percentage. It tells the business how profitable it is and if it is performing well. The GPM percentage needs to be compared.

2. Gross Profit / Sales Revenue x 100

Back

Preview of the back of card 3

Card 4

Front

Net Profit / Sales Revenue x 100

Back

Preview of the back of card 4

Card 5

Front

1. A business may have to decide between two projects, it cannot do both so will need to know which one will be the most profitable. The business will calculate the ARR of both projects and compare them. The project with the best result will go ahead.

2

Back

Preview of the back of card 5
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