the-importance-of-profit as

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Exam code:7131

Why is profit important?

Maximising, or increasing, profit is often a key objective for many businesses
Profit is important to businesses for a number of reasons

1. Financial reward

Profit is the financial reward that entrepreneurs receive in return for the risks they take
- Business owners invest long hours, creativity, their own money and effort to make a successful business

2. Source of finance

Retained profit can be used to fund the purchase of assets, pay bills and invest in research and development

3. Indicator of success

Increasing profitability suggests that a business is being run effectively and could be an attractive investment
To determine how well a business is performing, its profit levels can be compared over time and with similar businesses

The importance of profit to other organisations

Some public sector organisations, such as public corporations, can have the objective of making a profit
- Although social objectives may be more important, such as serving the local community, profits can be reinvested into services such as education and healthcare
- These profits, known as surpluses, could also be used to improve quality and service efficiency
Social enterprises also need to make a profit to survive, as they often have similar objectives to grow so they can fund their social objectives

Revenue and costs

Revenue

Revenue is the value of the units sold by a business
- E.g. the revenue earned by Apple Music from sales of music downloads
Revenue is a key business performance measure and must be calculated to identify profit
- It is calculated using the formula

$Revenue space equals space Selling space price space cross times space Quantity space sold$

Sales revenue usually increases as the quantity sold increases
When a business sells one product, it is easy to calculate the sales revenue
The more products a firm sells, the harder it is to calculate the sales revenue
- Computer systems improve the tracking of sales revenue when multiple products are sold by a business

Worked Example

In 2024, Fotherhill Organics Limited sold 39,264 packs of its specialist compost to mail-order customers. The price per pack was £8.75. In addition, it sold 4,280 tonnes to gardening businesses for £123.95 per tonne.

Calculate Fotherhill Organics’ sales revenue for 2024.

[3]

Answer:

Step 1: Calculate sales revenue from the sales to mail-order customers

$equals space 39 comma 264 space packs space cross times space £ 8.75 equals space £ 343 comma 560$ (1)

Step 2: Calculate sales revenue from the sales to gardening businesses

$equals space 4 comma 280 space packs space cross times space £ 123.95 equals £ 530 comma 506$ (1)

Step 3: Add together the two sales revenue figures

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Business AS AQA