3.4.1

Profitability Analysis

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Break-Even Analysis

Businesses can use breakeven analysis to predict the level of output at which total costs and total revenues will be the same.

Contribution per unit

Contribution per unit

  • Contribution per unit is the amount of revenue which contributes to covering a business' fixed costs after the variable cost per unit has been taken away from revenue per unit.
Calculating contribution per unit

Calculating contribution per unit

  • Contribution per unit is calculated as the selling price per unit – variable costs per unit.
Total contribution

Total contribution

  • Total contribution is the amount of revenue from the sale of all products which contributes to fixed costs once total variable costs have been taken away.
Calculating total contribution

Calculating total contribution

  • Total contribution is calculated as total revenue – total variable costs.

Profitability Analysis

Businesses can analyse their profitability using gross profit, operating profit, and profit for the year objectives.

Gross profit

Gross profit

  • Gross profit targets involve the amount of profit remaining once direct costs (cost of sales) have been paid by the business.
    • Gross profit margin = (gross profit ÷ sales revenue) × 100
  • For example, a supermarket may use gross profit margin targets to compare performance across years. A decrease in gross profit margins may lead the supermarket to focus on reducing the supermarket's cost of sales.
Operating profit

Operating profit

  • Operating profit targets involve the amount of profit remaining once direct costs (cost of sales) and indirect costs (expenses) have been paid by the business.
    • Operating profit margin = (operating profit ÷ sales revenue) × 100
Profit for the year

Profit for the year

  • A profit for the year target involves the amount of profit remaining once all costs and financing fees have been considered.
    • Profit for the year margin = (profit for the year ÷ sales revenue) × 100
Jump to other topics
1

Business Organisation & Environment

1.1

Introduction to Business Management

1.1.1Why Businesses Exist & Sectors
1.2

Types of Organisation

1.2.1Sole Traders1.2.2Limited Liability1.2.3Non-Profit1.2.4Franchising1.2.5End of Topic Test - Franchising
1.3

Organisational Objectives

1.3.1External Environments1.3.2Business Mission & Corporate Objective1.3.3Mission, Corporate Objectives & Strategy1.3.4SWOT Analysis1.3.5End of Topic Test - SWOT Analysis
1.4

Stakeholders

1.4.1Stakeholders
1.5

External Environment

1.5.1Social & Technological Environment1.5.2Lifestyle & Technological Environment1.5.3Corporate Social Responsibility1.5.4Economic Environment1.5.5Political & Legal Change
1.6

Growth & Evolution

1.6.1Growth & Retrenchment1.6.2Challenges of Growth1.6.3Growth Models1.6.4End of Topic Test - Diseconomies of Scale1.6.5Internationalisation1.6.6Sourcing Resources & Entering Markets1.6.7End of Topic Test - Internationalisation1.6.8Managing Internationalisation1.6.9Impact of Internationalisation
1.7

HL Only: Organisational Planning Tools

1.7.1Organisational Planning Tools
2

Human Resource Management

2.1

Functions & Evolution of Human Resource Management

2.1.1Setting Human Resource Objectives2.1.2Human Resource Management2.1.3Labour Turnover & Retention2.1.4Labour Productivity
2.2

Organisational Structure

2.2.1Organisational Structures
2.3

Leadership & Management

2.3.1Managers2.3.2Management Theories2.3.3End of Topic Test - Management
2.4

Motivation

2.4.1Motivating & Engaging Employees2.4.2Taylor's Theory2.4.3Maslow's Theory2.4.4Herzberg's Theory2.4.5Different Incentives2.4.6Evaluating Incentives
2.5

Organisational (Corporate) Culture

2.5.1Managing Organisational Culture2.5.2Organisational Structures
2.6

HL Only: Industrial/Employee Relations

2.6.1Improving Employer-Employee Relations2.6.2Case Study - The Winter of Discontent
3

Finance & Accounts

3.1

Sources of Finance

3.1.1Internal Sources of Finance3.1.2External Sources of Finance3.1.3Factors for Financing3.1.4End of Topic Test - Debt
3.2

Costs & Revenues

3.2.1Costs & Revenues
3.3

Break-Even Analysis

3.3.1Profit3.3.2Break-Even Analysis
3.4

Profitability & Liquidity Ratio Analysis

3.4.1Profitability Analysis
3.5

Cash Flow

3.5.1Cash Flow3.5.2Solutions to Cash Flow Problems3.5.3Improving Cash Flow & Profits
3.6

HL Only: Investment Appraisal

3.6.1Investment Appraisal
3.7

HL Only: Budgets

3.7.1Cash-Flow & Budgets
4

Marketing

4.1

The Role of Marketing

4.1.1Setting Marketing Objectives4.1.2Market Calculations
4.2

Marketing Planning

4.2.1Marketing Mix4.2.2Segmentation4.2.3Niche & Mass Markets
4.3

Market Research

4.3.1Market Research4.3.2Market Mapping4.3.3Methods of Market Research
4.4

The 4 Ps

4.4.1Product Decisions4.4.2Pricing Decisions & Price Skimming4.4.3Pricing Decisions & Price Penetration4.4.4End of Topic Test - Pricing & Competition4.4.5Promotional Decisions4.4.6Promotional Decisions 24.4.7Promotional Decisions 34.4.8Digital Marketing4.4.9Evaluating Digital Marketing4.4.10Case Study - The Marketing Mix & Promotion4.4.11Place & Distribution
4.5

HL Only: The Extended Marketing Mix

4.5.1The Extended Marketing Mix
4.6

HL Only: International Marketing

4.6.1International Marketing
4.7

E-Commerce

4.7.1E-Commerce
5

Operations Management

5.1

The Role of Operations Management

5.1.1Setting Operational Objectives
5.2

Production Methods

5.2.1Production Processes Overview5.2.2Production Processes5.2.3Production Efficiency5.2.4Technology & Production
5.3

HL Only: Lean Prodution & Quality Management

5.3.1Importance of Quality5.3.2Measuring & Identifying Quality5.3.3Total Quality Management5.3.4Evaluating Total Quality Management5.3.5Case Study - Toyota Production System
5.4

HL Only: Production Planning

5.4.1Capacity5.4.2Productivity & Efficiency5.4.3Technology & Efficiency5.4.4Improving the Supply Chain5.4.5Inventory5.4.6Outsourcing
5.5

HL Only: Research & Development

5.5.1Organisational Planning Tools

Practice questions on Profitability Analysis

Can you answer these? Test yourself with free interactive practice on Seneca — used by over 10 million students.

  1. 1
    A business sells pens for £0.8 per unit. The variable cost per unit is £0.4. What is the contribution per unit?Multiple choice
  2. 2
    A clothing retailer has annual sales revenue of £1,000,000. The cost of sales, which includes materials and production costs, amounts to £600,000. Calculate the gross profit margin for the retailer.Multiple choice
  3. 3
    A technology company reports sales revenue of £2,500,000 and has direct costs (cost of sales) of £1,200,000. The company also incurs indirect costs (expenses) totaling £700,000. Calculate the operating profit margin for the company.Multiple choice
  4. 4
    A restaurant generates a sales revenue of £800,000. After deducting all costs, including the cost of sales, expenses, and financing fees, the restaurant's profit for the year is £120,000. Calculate the profit for the year margin.Multiple choice
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Break-Even Analysis

Cash Flow