Profit and Success

Task

Take a look at the statements below. Each one refers to a situation that will have some effect on one or more of the measures of profit we have outlined.

• See if you can think through what the statement means, which measure of profit it will affect and how it might affect it.
• Then think about what other information you might need to help you decide whether the statement reflects the success of a business or not. (There are no right or wrong answers to this one but you should make sure that you explain your reasoning). We have done the first one as an example.

Explanation

The cut in variable costs would mean, other things being equal, that the total costs would fall. Assuming that the revenue stayed the same the profit would rise. But sales growth is down by 12%. This could mean that the revenue from sales is lower and so could have led to a fall in profit. It will depend on the effect of the fall in sales growth on revenue. If the revenue falls by a greater amount than the fall in costs then the profit could actually fall. It is not possible to say whether this reflects a successful business or not without more detail about the effect on sales revenue.

Statements

• 'Profits up by 5%, costs up by 10%'
• 'Margins down by 10%, sales up by 15%'
• '5% price cut sees volumes rise by 20%'
• 'Gross profit down by 2%, Net profits up by 1%'
• 'Price rise sees margins rise'
• 'Cost rise of 15% leads to rise in prices of 20%'