Page 288 - Cambridge IGCSE Business Studies

Cambridge IGCSE Business Studies Section 5 Financial information and decisions

EXAMPLE

Using the data from Table 23.2, the 2012 the profit margin for TT is:

63
Profit margin % (2012) = × 100
420
= 15%

This result tells us that every $1 of revenue earned $0.15 of profit.

This ratio measures the performance of the business in converting revenue into

profit. Since profit is the difference between revenue and total costs, that is:
TOP TIP
Do not confuse gross profit
Profi t = revenue − (costs of sales + expenses)
margin and profit margin.
To improve profit margin a business can:

■ improve gross profit margin (as discussed above)
KEY TERM
■ reduce expenses.
Adding value: selling a product
for more than it cost to produce it. Both the gross profit margin and profit margin can be used to measure how well

the business adds value and controls costs.
The gross profit margin is also a good measure of added value. Any improvement

in the gross profit margin from one year to the next indicates improved added value.
286 Also, if a business has a higher gross profit margin than a competitor, the business

Adding value: see Chapter 1, has achieved a higher added value for its products than its competitors.
page 16. Since profit before tax will always be lower than gross profit, this means that

the percentage profit margin will always be lower than the percentage gross profi t

margin. Th e difference between these two ratios is the effect that expenses have on

the profits of a business. Therefore, the profit margin is also a good measure of how
well the business has controlled its expenses.
ACTIVITY 23.3
The table below shows the gross profit margin and profit margin for two companies in the same industry over the three
years, 2010–2012.
Company A Company B
2010 2011 2012 2010 2011 2012
Gross profit margin (%) 23 24 25 30 28 26

Profit margin (%) 8 8.5 8 10 9.5 9
Table 23.3 Information for Companies A and B

1 Comment on the change in Company A’s gross profit margin between 2010 and 2012.
2 Compare the change in gross profit margin of Company A and Company B between 2011 and 2012.
3 Explain why you think the profit margin for Company A has decreased in 2012 despite an increase in the gross profit
margin.
4 Which company do you think has performed best over the period 2010–2012? Justify your answer.