pass first time! a2 business improving profitability 1
DESCRIPTION
One in a series which feature in the online A Level Business Course. Success rate is over 90% A*-B with www.freedomroadcollege.moonfruit.comTRANSCRIPT
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AQA A2 BusinessIMPROVING PROFITABILITY 1
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Teaser
A Business Ltd sells Boots. It sells 30,000 boots per year at £7 each.
Each pair of boots is purchased by the shop at £3 each. Annual Fixed Costs are £50,000.
Calculate a) Gross Profit and b) Net Profit
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Lesson Objectives
1. To be able to define the term profit margin (KNOWLEDGE)
2. To be able to calculate the profitability of a given business (APPLICATION)
3. To be able to provide advice on the most appropriate action for a business to improve profitability. (ANALYSIS/INSIGHT)
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Definition
The Profit Margin of a business may be defined as the profit made on a product as a proportion of sales revenue.
Mathematically this may be expressed as :
NET PROFIT→ Sales- Cost of sales- Expenses
SALES → Money made from selling products
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What are Cost of Sales?
Cost of Sales are the costs which are incurred in making a product available for sales. In general, it is the cost of stock.
The Cost of Sales figure is calculated as :
Opening Stock + Purchases (of stock) – Closing Stock
When considering business strategy, stock has become an ever important factor in the profit equation.
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Activity 1
Pablo supplies the following information for the year ended 28th February 2013
Stock at 1 March 2012 £211, Stock at 28 February 2013 £485, Purchases £27,665, Sales £74,882, Wages £32,559, Motor Expenses £11,456, Rates £674, General Expenses £5,391
Prepare a Trading Account and a Profit and Loss Account for the Year Ended 28th February 2013.
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How can the profit margin be improved?
Because Profit = Total Revenue – Total Costs
The profit margin can be increased in the following ways
1. Increase the price of the product
2. Reduce the costs of the product
3. A Combination of 1. and 2.
What would be the disadvantages of using option 1 and option 2.
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DISADVANTAGES EXPLAINED
1. Where prices are increased, there is a danger of losing customers. The likelihood of this will depend on
- the product
-the economy
2. The simplicity with which costs may be reduced will depend upon the size of the business and its relative power with suppliers.
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Activity 2.
The results for two businesses for two years are as follows: Calculate the Net Profit Margin for both companies for both years
2012 £ 2013 £
Sales – Food Supermarket
20,000,000 25,000,000
Sales – Corner garage 2,000,000 1,500,000
Net Profit – Food Supermarket
5,000,000 8,000,000
Net profit – Corner garage
700,000 500,000
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Activity 2 Continued
2. Which company displays the best profitability?
3. Which company is most likely to be able to use Option 1 most successfully and why.
4. Which company is most likely to be able to use Option 2 most successfully and why.
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When considering the advice you give…
It is important to consider the industry in which the business is operating in. The type of business will:
- Dictate the strength of the advice that you provide (HOW APPROPRIATE)
A good example of this is the current race for businesses to produce exclusive Apps. This is recognition of the strength of the technology market.
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Other Niche Markets
Health Products
Gym classes
Smart Phones (Cameras with bigger memories)
What are the advantages and disadvantages of operating in these markets.
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Exam Question
Exam Question Practice.
Income Statement 2012
£000 Revenue (Turnover) 200 000
Cost of sales 106 103
Gross profit 93 897
Operating profit 40 456