Business Studies – 5.5.1 Profitability | e-Consult

Gross Profit Margin:

Gross Profit = Revenue - COGS = £500,000 - £200,000 = £300,000

Gross Profit Margin = (Gross Profit / Revenue) x 100 = (£300,000 / £500,000) x 100 = 60%

Interpretation: A gross profit margin of 60% indicates that for every £1 of revenue, the company retains £0.60 after deducting the direct costs of producing and selling its goods. This suggests efficient production and pricing strategies. A higher gross profit margin is generally desirable as it provides a larger margin to cover operating expenses and generate profit.

Profit Margin:

Profit = Revenue - COGS - Operating Expenses = £500,000 - £200,000 - £100,000 = £200,000

Profit Margin = (Profit / Revenue) x 100 = (£200,000 / £500,000) x 100 = 40%

Interpretation: A profit margin of 40% means that for every £1 of revenue, the company makes a profit of £0.40 after all costs are considered. This indicates the company's overall profitability after accounting for both production and operating expenses. A 40% profit margin is a healthy level of profitability, suggesting good cost control and effective operations.