Profitability

Examples of Profitability in the following topics:

• Profit Margin

  • Profit margin measures the amount of profit a company earns from its sales and is calculated by dividing profit (gross or net) by sales.
  • Profit margin is one of the most used profitability ratios.
  • The higher the profit margin, the more profit a company earns on each sale.
  • Net profit is the gross profit minus all other expenses.
  • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .

• For-profit marketing versus nonprofit marketing

  • As the terms connote, the difference between for-profit and nonprofit marketing is in their primary objective.
  • For-profit marketers measure success in terms of profitability and their ability to pay dividends or pay back loans.
  • Continued existence is contingent upon level of profits.
  • Nonprofit institutions exist to benefit a society, regardless of whether profits are achieved.
  • While they are allowed to generate profits, they must use these monies in specific way in order to maintain their non-profit status.

• Profit

  • If the sole objective of a firm is to maximize profit, there are various profit maximizing pricing methods that can be used.
  • There are several methods to maximizing profits:
  • The purpose of profit-based sales target metrics is to ensure that marketing and sales objectives mesh with profit targets.
  • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.
  • Recall formulas for calculating profit maximizing output quantity and marginal profit

• Difference Between Economic and Accounting Profit

  • The term "profit" may bring images of money to mind, but to economists, profit encompasses more than just cash.
  • In general, profit is the difference between costs and revenue, but there is a difference between accounting profit and economic profit.
  • The biggest difference between accounting and economic profit is that economic profit reflects explicit and implicit costs, while accounting profit considers only explicit costs.
  • Economic profit includes the opportunity costs associated with production and is therefore lower than accounting profit.
  • Economic profit also accounts for a longer span of time than accounting profit.

• Management in Different Types of Business: For-Profit, Non-Profit, and Mutual-Benefit

  • A for-profit business is an organization engaged in the trade of goods, services, or both to customers with the goal of earning profit to increase the wealth of the business's owners.
  • In contrast, a non-profit organization is legally prohibited from making a profit for owners.
  • A mutual-benefit non-profit corporation can be non-profit or for profit.
  • For example, a manager of a for-profit company may be able to motivate employees through bonuses for sales targets or profit sharing.
  • This strategy cannot work for a non-profit or mutual-benefit corporation.

• The Supply Curve in Perfect Competition

  • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
  • Profit maximization is the short run or long run process that a firm uses to determine the price and output level that returns the greatest profit when producing a good or service.
  • When a table of costs and revenues is available, a firm can plot the data onto a profit curve.
  • The profit maximizing output is the one at which the profit reaches its maximum .
  • Profit maximization is directly impacts the supply and demand of a product.

• Cost of Goods Sold and Gross Profit

  • Gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service.
  • In accounting, gross profit or sales profit is the difference between revenue and the cost of making a product or providing a service before deducting overhead, payroll, taxation, and interest payments.
  • Note that this is different from operating profit (earnings before interest and taxes).
  • Net income (or Net profit) = Operating profit – taxes – interest
  • Explain the difference between cost of goods sold and gross profit

• Sources and Determinants of Profit

  • Consequently, the firm earns $25,000 in economic profit.
  • Economic profits may be positive, zero, or negative.
  • In the short run, a firm can make an economic profit.
  • An economic profit of zero is also known as a normal profit.
  • Despite earning an economic profit of zero, the firm may still be earning a positive accounting profit.

• Gross Profit Method

  • The gross profit method uses the previous year's average gross profit margin to calculate the value of the inventory.
  • Keep in mind the gross profit method assumes that gross profit ratio remains stable during the period.
  • Determine the gross profit ratio.
  • Gross profit ratio equals gross profit divided by sales.
  • Use projected gross profit ratio or historical gross profit ratio whichever is more accurate and reliable.

• Profitability Ratios

  • Profitability ratios show how much profit the company takes in for every dollar of sales or revenues.
  • Profit Margin: The profit margin is one of the most used profitability ratios.
  • The profit margin refers to the amount of profit that a company earns through sales.
  • The profit margin ratio is broadly the ratio of profit to total sales times one hundred percent.
  • The higher the profit margin, the more profit a company earns on each sale.