Profit is a financial benefit achieved when the amount of revenue generated by a financial transaction meets the expenditure, cost, and taxes necessary to facilitate the business. In simpler terms, profit is the excess of revenue over expenditure. It can be better defined with the help of the following terms: -
Cost Price (CP): The cost price is the amount of money spent on making the product. For example, if Leela is making cotton skirts, the amount of money spent on getting the cotton fabric, buttons, and other materials are referred to as the cost price.
Selling Price (SP): After investing in making a product, a businessman always aims to earn more than what he spent. So, in this case, Leela is selling her skirts at a price above her cost price. The cost at which the product is sold is called Selling Price. It is the price the customer (buyer) pays for the product.
Profit (P): In math, profit is the difference between the selling price and the cost price. But only if the SP>CP, then there is a profit.
Loss (L): The loss is the difference between the selling price and the cost price. But only if the CP>SP, then there is a loss. Loss is bad for business as the businessman loses a part of the money he spent on making the product. Loss can also be defined as a negative profit.
When the cost price is subtracted from the selling price, the resulting answer is the profit.
Profit = Selling Price – Cost Price
P = SP - CP
If the answer to SP - CP comes as a positive integer, then we have a profit. If it is a negative integer, we have a negative profit, which is termed as a loss.
A percentage is one of the most preferred ways of comparing two quantities. The profit is always compared to the cost price unless it is explicitly mentioned in the question that it is compared to the selling price. Suppose Leela has a 20% profit percentage. Then, she has earned Rs.20 profit for every Rs.100 at cost price.
Profit Percentage = \[(\frac{\text{Profit}}{\text{Cost Price})}\] × 100
P% = \[(\frac{P}{CP})\] × 100
Profit | Gain |
Profit is the selling price, minus the cost price of a particular product. | Gain is the money earned by selling fixed or financial assets. |
Profit is incurred through normal business operations. | Gain is earned outside of usual business operations. |
Types of Profit
The three main types of profit are explained below:
Gross Profit: Gross profit is the profit that a company makes after subtracting the costs of manufacturing and selling its products. Also called gross income, it is calculated by subtracting the cost of goods sold from revenue. The gross profit contains only variable costs and does not contain fixed costs.
Operating Profit: Operating profit represents the additional income that remains after accounting for all the costs of doing business. It is basically the ratio of the operating income to the sales revenue.
Operating Profit = Operating Income: Sales Revenue
Net Profit: Net profit is the money that remains after accounting for every sing expense or cost incurred by the company. It is the most important thing to ensure the company’s financial health.
Example 1: A retailer bought 10 apples for Rs. 100. He sold them for Rs. 150. How much is the profit he got per apple? What is his total profit?
Solution:
Cost Price (10 apples) = Rs.100
Cost Price (1 apples) = 100/10 = Rs. 10
Selling Price (10 apples) = Rs. 120
Selling Price (1 apples) = 120/10=Rs.12
Profit (for 1 apple) = SP-CP (one apple)
= 12 - 10= Rs. 2
So, his profit per apple is Rs. 2.
Profit (10 apples) = SP-CP (ten apples)
= 120 - 100= Rs. 20
So, his total profit is Rs. 20.
Example 2: A girl buys a blue umbrella for Rs. 200 and sells it at a profit of 25%. What is the selling price of the fan?
Solution:
Cost Price (umbrella) = Rs.200
Profit Percentage = 25%
P% = (P/CP) × 100
25 = (P/200) x 100
P = Rs. 50
As we know,
P = SP-CP
SP = CP+P
SP = 200 + 50
Selling Price = Rs. 250
Therefore, the selling price of the umbrella was Rs. 250.
Example 3: Meera sold a beautiful sculpture for Rs.5,000, on which she makes a profit of 25%. What is the amount of money she spent while making the sculpture?
Solution:
Profit Percentage = 25%
Selling Price= Rs. 5000
CP + (25/100 of CP) = 5000
(125/100) * CP = 5000
(5/4) * CP= 5000
CP= 5000* (4/5)
CP=Rs. 4000
Therefore, the cost price of the sculpture is Rs. 4000.
How to Calculate the Profit in Five Simple Steps.
Follow the steps below to measure the income obtained by any business:
Determine the value of the sold products.
Calculate the average selling price for the sold items.
To evaluate the profit earned, take the difference of the cost price and the selling price.
To get the profit margin, divide the amount of profit by cost price.
To get the profit percentage to multiply the profit margin by 100.
Why is the Profit Percentage Calculated on the Cost Price?
Profit percentage is taken against the cost price because usually, the business owners want to calculate the amount of profit they have earned per hundred rupees they have spent while manufacturing a particular product. If the profit is calculated on the selling price, they would be able to determine how much profit they are earning per hundred rupees spent by the customer on their product. This statistic, however, is not so valuable.
Is the Selling Price the Price Before Discount or After?
The selling price is the final price paid by the customer for the goods. In case the shopkeeper gives a discount, the selling price is taken as the price paid after discount.
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