5.3.2 Statement of profit or loss (3)
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1.
ABC Retail had the following financial figures for the year ended December 31st, 2023:
- Revenue: £85,000
- Cost of Sales: £45,000
- Operating Expenses: £15,000
Calculate ABC Retail's Gross Profit and Net Profit. Show your calculations.
Gross Profit Calculation:
Gross Profit = Revenue - Cost of Sales
Gross Profit = £85,000 - £45,000 = £40,000
Net Profit Calculation:
Net Profit = Gross Profit - Operating Expenses
Net Profit = £40,000 - £15,000 = £25,000
Answer:
Gross Profit: £40,000
Net Profit: £25,000
2.
The profit and loss account for XYZ Services for the year to December 31st, 2023 is as follows:
| Item |
| Revenue | £120,000 |
| Cost of Sales | £60,000 |
| Gross Profit | £60,000 |
| Operating Expenses | £30,000 |
| Net Profit | £30,000 |
Calculate the Gross Profit for XYZ Services.
Calculation:
Gross Profit = Revenue - Cost of Sales
Gross Profit = £120,000 - £60,000 = £60,000
Answer:
The Gross Profit for XYZ Services is £60,000.
3.
Explain why a business might show a low gross profit, even if its revenue is high. Provide two possible reasons and explain how these would affect the overall profitability of the business.
A business might show a low gross profit despite high revenue for several reasons. Here are two possibilities:
- 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.
- 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.