Business profit & profitability ratios

A book shop has a gross profit margin of 60%.

This means that:

A for every £1000 of books sold, the shop made a gross profit of £400

B for every £1000 of gross profit, the cost of the books sold was £600

C for every £1000 of gross profit, the shop had revenues of £600

D for every £1000 of revenue, the cost of the books sold was £400

Text 1

_{Adapted from www.drmartensplc.com/sustainability/ and www.drmartensplc.com/sustainability/product/. Item removed due to third party copyright restrictions.}Dr Martens plc

In 2023 DM’s accounts showed the data below.

Fig. 1 Selected financial data for Dr Martens plc 2023

State two production processes.

State two reasons why a business may aim to be environmentally friendly.

Calculate DM’s net profit margin for 2023 to two decimal places.

Show your workings.

........ %

Analyse one reason for DM of using the financial data in Fig. 1 to make decisions about how to meet its sustainability objectives.

Explain one way climate change may affect a business.

Analyse one disadvantage for DM of changing the supply chain for leather to meet its sustainability objectives.

Analyse one advantage for DM of changing its packaging to meet its sustainability objectives.

Recommend which of the two sustainability objectives (the supply of leather or the change in packaging) DM should prioritise.

A company has recently experienced a fall in its net profit margin from 4.2% to 2.9%.

This means that:

A every £100 of sales earns £1.30 less net profit than it used to

B for every £100 of sales the company only earns £1.30

C net profit levels have fallen by 1.3%

D the company has made a net loss of 1.3%

A market trader paid £4600 for goods which they sold for £12 500.

The market trader’s gross profit margin was approximately:

A 37%

B 63%

C 79%

D 172%

The net profit margin of a business has increased from 6% in 2021 to 9% in 2022.

Which of the following must be true for this business?

A Expenses have fallen by 50%

B Net profit has increased by 3%

C Profitability has increased by 50%

D Revenue has increased by 3%

Text 2

AstraZeneca plc

AstraZeneca plc (AZ) is a multinational pharmaceutical company that operates in over 100 countries around the world. AZ develops treatments for a range of diseases. It sells its medicines and vaccines worldwide. Its headquarters are in Cambridge, England. In 2021 AZ’s sales revenue was £37 417m, from which it made £24 980m gross profit.

AZ has a code of ethics, which is at the centre of everything that it does. The company has approximately 75 000 employees worldwide; 10 000 of these work in its three research and development centres.

AZ uses technology throughout its operations to provide high quality products for its customers. These customers include doctors, hospitals and governments from around the globe.

In the UK, AZ has changed the way it sells its products. Previously, sales staff would visit medical professionals; now it uses a call centre and website where medical professionals can order products and samples. AZ says this means it can now provide a high quality service that meets the needs of its customers at a lower cost.

Identify two ethical considerations a business may have.

State two reasons why quality in the production of goods is important to a business.

Analyse one reason why it is important to AZ that its call centre employees have good product knowledge.

Calculate AZ’s gross profit margin for 2021.

Show your workings

Answer........

Explain one way technology might affect production at AZ.

Analyse one advantage and one disadvantage to AZ of operating as a multinational company.

Recommend whether AZ should continue to operate as a multinational company.

A perfume shop has a gross profit margin of 50%.

This means:

A for every £10 of sales, it makes £5 profit after all costs have been paid

B the perfume shop’s variable costs are exactly half of its fixed costs

C the shop charges customers double what it pays when buying the perfume

D to make £10 of profit, it needs to sell £50 of perfume

Text 2 Quality Textiles (QT)

Quality Textiles Ltd (QT) is a medium-sized, established business that manufactures clothes from its factory in Birmingham. Its clothes are sold to retail shops around the country. A summary of its profitability is shown in Table 1.

QT wants to expand the business by using a bank loan to buy a large van to help with deliveries. It will use average rate of return (ARR) to assess which model of van it will buy. Further information is provided in Table 2, below. The new van will mean employing a driver, in addition to the five drivers already working for the business.

QT’s cash flow forecast suggests it may struggle to pay the monthly van loan repayment. QT’s closing bank balance for the last five months is shown in Fig. 1.

QT had problems earlier in the year. It found its way into the local newspaper as part of an investigation into ethical practices in its business activities and supply chain.

Identify one method of selling products to customers.

Identify two ethical considerations for a business.

Explain one reason why a business should act ethically.

Calculate the average rate of return (ARR) for the Standard Van by using the information in Table 2.

Show your workings

Answer........ %

Analyse one reason why QT should buy the Standard Van. Refer to Table 2 in your answer.

Analyse QT’s cash position considering its current expansion plans.

Analyse QT’s profit position considering its current expansion plans.

Recommend whether QT’s cash position or profit position will have the biggest impact on its expansion plans.

Text 2

Ricardo Costumes and Props (RCP)

Alessia and Natalia own Ricardo Costumes and Props (RCP). The business operates as a partnership. RCP makes a range of costumes and props that it sells to UK and EU theatres, schools and amateur dramatics groups.

Last year, RCP’s costumes and props were used in two very successful films. RCP’s reputation grew rapidly and its revenue increased from £1 600 000 in 2019 to £2 000 000 in 2020. More financial data for RCP in 2020 is shown in Table 1, below.

Despite being profitable, RCP’s bank overdraft is getting bigger every month. Alessia and Natalia realise that they need to carefully consider RCP’s cash flow position.

Alessia and Natalia need to update the laser cutter and 3D printer they use to make some of the props. The total cost of these machines is likely to be over £100 000. Alessia and Natalia are unsure how to finance the purchase of the new machinery. Natalia has suggested they try and sell the old machines and use the money to buy new ones. Alessia thinks it might be better to gain extra capital by finding a new partner to join the business.

State one reason why cash is important to a business.

Explain one use of a cash flow forecast in a business.

Identify two variable costs which a business may incur.

Calculate RCP’s net profit for 2020.

Show your workings.

Answer £........

Analyse one way Alessia and Natalia could use the data shown in Table 1 to improve their net profit margin.

Analyse one advantage to RCP of selling its old machines to finance the purchase of the new machinery.

Analyse one disadvantage to RCP of selling its old machines to finance the purchase of the new machinery.

Recommend whether RCP should finance the purchase of the new machinery by selling its old machines or by taking on a new partner.