Page 163 - BA2 Integrated Workbook STUDENT 2018
P. 163
Performance measurement
Gross profit
Gross margin = ––––––––––––– × 100
Sales revenue
This measure helps to highlight the relationship between sales revenues and
production/purchasing costs.
A high gross profit margin is desirable. It indicates that either sales prices/volumes
are high or that production costs are being kept well under control.
As it is a % measure, it can be used to compare the performance of different areas of
the business or different products.
Division 1 Division 2
1,800 1,700
Gross margin = ––––––– × 100 = 36% ––––––– × 100 = 57%
5,000 3,000
2.4 Net (operating) profit and net (operating) margin
Net (operating) profit = gross profit – non production costs
Net profit is also known as operating profit. It is also called earnings before interest
and tax in the financial statements. This is a useful measure which shows how much
profit the company has generated in the period. It shows if the sales revenue is
enough to cover the direct cost of the item sold and all expenses.
Division 1 Division 2
$000 $000
Sales revenue 5,000 3,000
Variable production costs 2,500 800
Fixed production costs 700 500
Variable non-production costs 200 150
Fixed non-production costs 800 400
–––––– ––––––
Net (operating) profit 800 1,150
–––––– ––––––
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