One in a series which feature in the online A Level Business Course. Success rate is over 90% A*-B with www.freedomroadcollege.moonfruit.com

1. AQA A2 Business
IMPROVING PROFITABILITY 1

2. 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

3. 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)

4. 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

5. 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.

6. 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.

7. 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.

8. 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.

9. 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

10. 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.

11. 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.

12. Other Niche Markets
 Health Products
 Gym classes
 Smart Phones (Cameras with bigger memories)
 What are the advantages and disadvantages of operating in these
markets.

13. 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