Introduction of Profit Formula with Solved Examples
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Profit is a measure of the benefit gained by a corporation or an individual from the employment of capital or assets, or from refraining from such use. Profit is equal to the number of goods produced (or total productive output) minus the cost used up in producing those goods.
With the help of profits, a corporation will be able to develop its capabilities and thus round off its activities. the formula of profit helps a corporation to make a sustainable profit. if a person knows about profit and loss and wants to be a loyal and successful entrepreneur, then he must know how it works.
Revenue and Total Revenue
Revenue is the inflow of cash or other assets that are linked with an increase in net worth for a business concern. It's not all sales and income, but only the part of sales and income that is associated with increases in shareholder equity retained earnings and cash flow. Revenue is the amount of income obtained from the activity of selling and delivering goods and services. Revenue is a quantitative measure of the amount in money, by business activities, with the assistance of an enterprise.
Profit = total revenue - total cost
Total Revenue is the combined total of sales revenues and other revenues. Revenue that is obtained from the activity of selling and delivering goods and services are called sales revenues whereas other revenues are income that is obtained from other business activities. Revenue can be broadly classified into two types, i.e., Sales revenue and other revenues.
Formula Profit and Loss
Profit is the net income and is also the number of earnings that exceeded expenses for the tenure of time. Simply say, profit is the amount of income that is in surplus after performing all the requisite and matched expenses deducted for the period. It is only the amount of profit that encourages an individual, specifically a businessman to undertake a business.
Profit or Gain Formula = Selling Price (S.P) – Cost Price (C.P)
Loss Formula = Cost Price (C.P) – Selling Price (S.P)
Profit Percentage Formula
One of the most significant mathematical formulas, profit and loss formulas are used to calculate not only many maths problems but are quite crucial in our daily life. These formulas are greatly applicable in small and large businesses, retail, corporate sectors, and those linked with finance besides the calculations involved at an academic level.
Importance of Profit Percentage Formula
In retail, profit and loss formulas are used to identify the price of a product/service in the market. Every commodity in the market comes with a cost price and a selling price. With the help of these allocated price values, we can calculate the profit gained and also the loss of money in a specific product/service. For any seller or trader, if the value of the cost price is less than the selling price of a commodity, then it’s a profit but if the value of the selling price is less than the cost price, then it’s a loss for him.
Operating Profit Formula
To calculate the operating margin, we need to divide operating income (earnings) by sales (revenues). Operating margin is a profitability ratio that depicts the amount of profit that a company/seller makes from its core operations concerning the total revenues it brings in. That said the formula to calculate operating profit margin is as follows:
Operating Profit Margin Formula = Operating Income (earnings) ÷ sales (Revenue).
Calculate Operating Profit From Gross Profit
It is the difference between total revenue earned from selling a commodity and the total cost of goods/services sold.
Gross Profit (GP) = Net Sales – COGS (Cost of Goods Sold)
Operating Profit = Gross Profit (GP) – Operating Expenses.
Important Definitions in Profit and Loss
Loss is the amount that a seller incurs when the selling price is lesser than the cost price. This difference in the amount is the loss incurred for the period. Note that selling price is the price at which an article or a service is sold.
Important Formulas to Calculate Profit and Loss
Element Formula
Profit
Selling Price – Cost Price
Loss
Cost Price – Selling Price
Profit %
Profit / Cost Price × 100
Loss %
Loss / Cost Price × 100
Selling Price (SP)
(100+Gain/Profit × CP)
Selling Price (SP)
(100−Loss × CP)
Cost Price (CP)
100/(100+Gain/Profit × Selling Price (SP)
Cost Price (CP)
100/(100–Loss × Selling Price (SP)
Solved Examples
Example 1: A student bought a bag for Rs. 350 and later sold it for Rs. 400. Find the profit percentage he earned.
Solution:
Profit = SP – CP
= 400 – 350 = 50.
Gain% = (50/350) × 100
= 100/7%
Example 2: A man sold a painting for Rs. 525. Find the cost price if he incurred a loss of 9%.
Solution:
CP = 100/(100–Loss × SP)
Thus, the cost price of the painting= (100/91)*525 = Rs. 576.90
Example 3: In a transaction, a seller incurred a profit percentage of 70% of the cost. If the cost is further increased by 10% however the selling price remains the same, calculate the reduction in profit percentage?
Solution:
Suppose that Cost Price (CP) = Rs. 100.
Then Profit = Rs. 70 and SP = Rs. 170.
The cost increases by 10% → New CP = Rs. 110, SP = Rs. 170.
Profit % = 60/110 * 100 = 55.54%.
Hence, Profit decreases by 45.45%.
Example 4: If profit% of M and N are the same on selling the articles at 2400 each, but A calculates his profit on s.p. while B calculates it on c.p. This profit is equal to 25% each. What is the difference between their profit?
Solution:
Let the Cost price of M and N be m, n respectively.
Now for M,
2400-m/2400 = 25/100
After calculating m = 1800
Again for N,
2400-n/n = 25/100
After calculation ‘n’ = 1920
So the profit of M = 600(2400 – 1800)
And Profit of N = 480(2400-1920)
Hence the difference between their profit = 120
Fun Facts
Remember that both Profit and Loss are always calculated on the CP (cost price).
Marked price is the price marked as the selling price (SP) on a commodity, which is also known as the listed price.
Discount or Rebate is the reduction in price offered by the seller on the listed price.
Conclusion:
Marked price is the price at which a seller lists a commodity for selling. Gross Profit or Gross Margin is the difference between the selling price and the cost price. Operating Profit Margin is a profitability ratio that depicts the amount of profit that a company/seller makes on its revenues. Loss is the amount that a seller incurs when the selling price is lesser than the cost price.
Profit is the amount that a seller earns when the selling price is greater than the cost price. Gain/Profit is always calculated on the SP (selling price). Loss/Loss is always calculated on the CP. Thus, Profit % = Gain/Profit *100 and Loss % = Loss/Loss * 100. The difference between the two is the percentage of gain or loss.
FAQs on Profit Formula
1. Why is Earning Profit Significant to us?
Under the market economy, this profit encourages works as an incentive in assigning resources in the production products. It is basically in compliance with the needs and preferences of the consumer. If a trader fails to work in a way as desired by the consumers, their possibility of earning higher profit decreases significantly.
2. What is the use of the Profit Formula?
The profit formula gives a better understanding of the financial gain and loss for a period, which helps both entrepreneurs and investors to make important decisions about business uncertainty. Note that this also includes dividend declaration and price-earnings (P/E) ratios for stocks and shares. Moreover, it is very useful for employees to understand their salary and wage structure. The profit formula helps them all to determine how much they earn from the company after tax and other statutory deductions. With the help of the profit formula, one can also determine how much money is available for making payments to investors on exit.
3. What do we Understand by Cost Price?
The cost price (CP) is the price at which a commodity was originally purchased. Moreover, the loss will accrue if the cost price is greater than the selling price of a commodity
4. What is the importance of Profit Margin?
Profit margin indicates the amount a seller makes from its core business as a percentage of sales. It gives an idea to investors how efficient a company/seller is in converting sales into profits. That said, it also reveals how competitively one can sell a product or service since competition is always tough among sellers. profit margin is an indicator of the business's competitiveness. A high-profit margin means that a company is doing well, while a low one means it has to improve its operations to become profitable.
5. What is Operating Profit?
Operating Profit (OP) = Sales – Operating Expenses (OE). OE mainly includes costs like administrative, selling, and distribution expenses. It is also known as the earnings before interest and tax (EBIT). Operating Profit shows how much money a business has earned to cover its expenses other than interest and tax. operating profit helps an investor to understand the performance of a particular company so that they can decide on further investing in it. It shows how efficiently a business is using its resources.
6. Why is Selling Price Important?
Selling price determines the ultimate income that one can obtain from a product or service. The selling price is also known as the list price of a commodity. It shows whether a seller is charging a high or low price for its product. The selling price is also critical since it affects the mark-up percentage, which can be used to determine the profit of a company. Mark-up percentage is the amount added to the cost price (CP) to arrive at the selling price (SP).
7. What is the difference between Profit and Dividend?
Profit and dividends always go hand in hand. A company earns a profit that is later distributed as dividends to its shareholders. However, it is up to the company's board of directors to announce a dividend for a particular period. Generally, a small percentage of a company's earnings is divided among its investors as dividends. The more profitable a company is, the higher the percentage of earnings that are distributed as dividends. The dividend is the reward given to the shareholders for investing in a company. On the other hand, profit is what is left after all expenses (costs like rent, salaries, marketing, etc.) are paid by the company.