how to improve profit
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financial_management_keywords_starter.docx | |
File Size: | 14 kb |
File Type: | docx |
3.2_how_to_improve_profit_starter_activity.docx | |
File Size: | 38 kb |
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To improve profit, a business can look to either cut its costs or increase its revenue. There are several different ways a business can do this. However, there is no guarantee that they will lead to an increase in profit.
3.2_how_to_improve_profit_activity_v.2.docx | |
File Size: | 42 kb |
File Type: | docx |
Task: For all the methods included in the table, write down the disadvantages associated with them.
The relationship between price, revenue and profit
Profit = Revenue - Costs
It would seem simple, that to increase profits you would raise prices.
What impact would this have?
Think about price elasticity. Generally a cut in prices leads to more bought and vice versa. But selling more at a lower price doesn't guarantee higher revenue. The impact of a change of price on total revenue depends on the sensitivity of sales to changing prices.
Price = £200
Quantity sold = 50
Revenue = £10,000 (This business wants to increase revenue so cuts price to £100)
Two different things could happen:
Price = £100
Quantity sold = 55
Revenue = £5,500
Price = £100
Quantity sold = 150
Revenue = £15,000
This business could also look to increase revenue by raising the price
Price = £300
Quantity sold = 45
Revenue = £13,500
A business thinking of changing prices, therefore, will need to think about the percentage change in price and the corresponding percentage change in sales that might result. In general, if a small percentage price cut leads to a much larger pecentage rise in sales, then revenues will go up and vice versa.
Profit = Revenue - Costs
It would seem simple, that to increase profits you would raise prices.
What impact would this have?
Think about price elasticity. Generally a cut in prices leads to more bought and vice versa. But selling more at a lower price doesn't guarantee higher revenue. The impact of a change of price on total revenue depends on the sensitivity of sales to changing prices.
Price = £200
Quantity sold = 50
Revenue = £10,000 (This business wants to increase revenue so cuts price to £100)
Two different things could happen:
Price = £100
Quantity sold = 55
Revenue = £5,500
Price = £100
Quantity sold = 150
Revenue = £15,000
This business could also look to increase revenue by raising the price
Price = £300
Quantity sold = 45
Revenue = £13,500
A business thinking of changing prices, therefore, will need to think about the percentage change in price and the corresponding percentage change in sales that might result. In general, if a small percentage price cut leads to a much larger pecentage rise in sales, then revenues will go up and vice versa.
There is a more complex impact on profit.
A cut in price can lead to increased sales, but this is likely to increase production costs.
If a business raises its prices and loses sales, costs of production should fall.
So the overall impact of a change in price on profit depends on what happens to the quantity of sales and to costs.
Task: Summarise this information.
A cut in price can lead to increased sales, but this is likely to increase production costs.
If a business raises its prices and loses sales, costs of production should fall.
So the overall impact of a change in price on profit depends on what happens to the quantity of sales and to costs.
Task: Summarise this information.