A business might show a low gross profit despite high revenue for several reasons. Here are two possibilities:

1. High Cost of Sales: If the cost of producing the goods or services is very high (e.g., due to expensive raw materials, inefficient production processes), the difference between revenue and cost of sales will be small, resulting in a low gross profit. This directly reduces the amount of profit available to cover expenses.
2. Low Selling Prices: If the business is forced to sell its products or services at low prices to compete with rivals or clear stock, the revenue generated will be high, but the cost of sales will be relatively low. This can lead to a low gross profit margin. While revenue is high, the profit margin is poor, impacting overall profitability.

Impact on Overall Profitability: Both of these scenarios negatively impact overall profitability. A low gross profit leaves less money available to cover operating expenses, potentially leading to a loss. The business needs to address either the cost of sales or pricing strategy to improve its profitability.

Gross Profit: This is calculated by subtracting the Cost of Sales from the Revenue.

Gross Profit = Revenue - Cost of Sales

Gross Profit = £80,000 - £30,000 = £50,000

Profit: This is calculated by subtracting all Expenses from the Gross Profit.

Profit = Gross Profit - Expenses

Profit = £50,000 - £20,000 = £30,000

Meaning:

• Revenue: The total income generated from the sale of goods or services.
• Cost of Sales: The direct costs associated with producing the goods sold (e.g., raw materials, direct labour).
• Gross Profit: The profit made after deducting the cost of sales. It shows the profitability of the core business activities.
• Expenses: The costs incurred in running the business, such as administrative costs, marketing costs, and depreciation.
• Profit: The final profit remaining after deducting all expenses from the gross profit. It represents the overall profitability of the business.

Calculation of Profit:

• Revenue per cupcake: £3
• Cost per cupcake: £1.50
• Profit per cupcake: £3 - £1.50 = £1.50
• Total profit: £1.50 x 500 = £750

Is the profit sufficient?

£750 profit may not be sufficient to continue operating. While a positive profit is essential, the bakery needs to consider other factors:

• Fixed Costs: The bakery likely has fixed costs such as rent, utilities, and equipment depreciation. The £750 profit needs to cover these costs. Without knowing the fixed costs, it's impossible to say if the bakery is truly viable.
• Opportunity Cost: Could the owner earn more by investing the £750 elsewhere?
• Future Growth: Is the bakery planning to expand? The profit should be reinvested to support growth.
• Competition: The bakery needs to consider the level of competition in the market. A small profit margin might not be sustainable if competitors offer similar products at lower prices.
• Customer Satisfaction: Are customers happy with the quality and price of the cupcakes? Unhappy customers will lead to lower sales.

Conclusion: While the £750 profit is a positive sign, a comprehensive assessment is needed, considering fixed costs, opportunity costs, future plans, competition, and customer satisfaction, to determine the bakery's long-term viability.