Profit margins and ARR (Edexcel GCSE Business): Flashcards
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What profit margins show
What profit margins show
How much profit a business generates from its sales (as a %)
What gross profit margin (GPM) measures
What gross profit margin (GPM) measures
% of sales revenue that becomes gross profit
GPM formula
GPM formula
(Gross profit ÷ Sales revenue) × 100
Meaning of 40% GPM
Meaning of 40% GPM
40p from every £1 of sales becomes gross profit
Type of costs GPM focuses on
Type of costs GPM focuses on
Direct production costs only
What net profit margin (NPM) shows
What net profit margin (NPM) shows
% of sales revenue remaining as net profit after all expenses
NPM formula
NPM formula
(Net profit ÷ Sales revenue) × 100
Meaning of 8% NPM
Meaning of 8% NPM
8p from every £1 of sales becomes net profit
Which margin includes all expenses - GPM or NPM?
Which margin includes all expenses - GPM or NPM?
NPM
Which is typically lower - GPM or NPM?
Which is typically lower - GPM or NPM?
NPM (includes more costs)
What ARR helps businesses evaluate
What ARR helps businesses evaluate
Investment opportunities
ARR formula
ARR formula
(Average annual profit ÷ Cost of investment) × 100
Formula for average annual profit
Formula for average annual profit
Total profit over period ÷ Number of years
What higher profit margins indicate
What higher profit margins indicate
Better efficiency and profitability
ARR is expressed as what unit?
ARR is expressed as what unit?
Percentage