Gross profit and net profit
Richard Branson is head of the Virgin group, earning millions and spanning the world. Yet he doesn't know the different between gross and net profit. So within the next 10 minutes you could get the advantage.

They are a few misconceptions about how profit is worked out. First of all net profit is not gross profit minus tax. It's nothing to do with tax; it's about expenses as a whole. Second net profit is worked out as a whole, not based on variable costs.

Gross profit is what most people think of as profit. How much you make on each item regardless of other costs and expenses. So for instance if you bought at phone for $10 and sold it for $15 you would have made $5 profit, it's as simple as that.

This didn't include things like having a one of shipping fee for all your phones or all your other expenses. So it is not the most accurate way of calculating a firm's profitability.

Net profit is your profit based on all your other expenses. So say if you bought the phone for $10 and sold it for $25, you would make $15 gross profit. But if on average it cost you an extra $10 in wages, property rental, etc, you would only make $5 net profit.

Let's look at an example of this. If a shop sells 1,000 wholes in a year then their expenses for the raw materials, in this case the phones would be $10,000. Now let's also say rental for the premises, wages, etc cost an extra $15,000. The shop is selling the phones for $30. So selling 1,000 phones at $30 their total revenue for the year would be $30,000.

To work out their gross profit you need to take away the raw material price from the selling price, in this case, $30,000 - $10,000. This leaves you with $20,000. This would be your gross profit for that year.

Now to work out the net profit for this year you need to take away the other expenses, the fixed costs, which remain the same however many phone the shop sells.

Posting
This article was posted by mworld.

Discuss
Discuss this article on the forums...