Fundamentals of Business

Profitability

Profitability is a measure of operating performance. The opposite of profit is loss. A point where neither profit nor loss is made is known as break even.

Profit For a single transaction, is the excess of selling an item or service above the cost of providing it. In other words is known as contribution.

Mathematically, transaction profit = item selling price - cost of production (variable) of an item

For a period of trading It the total sales minus variable and fixed costs per trading period

Mathematically, trading profit = total sales per period - (variable + fixed costs per trading period)

Gross profit is profit before Selling, General and Administrative costs (SG&A), like depreciation and interest; it is the Sales less direct Cost of Goods (or services) Sold (COGS),

Net profit (before tax) is the sales of the firm less costs such as wages, rent, fuel, raw materials, interest on loans and depreciation. Costs such as depreciation and amortization tend to be ambiguous.

Net profit after tax is after the deduction of either corporate tax (for a company) or income tax (for an individual).

Operating profit is a measure of a company's earning power from ongoing operations, equal to earnings before the deduction of interest payments and income taxes.

Contribution of every item on the menu:
Jacket potatoes = £ (1.50 - 1.00) = £0.50
Heinz baked beans = £ (0.50 - 0.30) = £0.20
Tea = £ (0.50 -0.20) = £0.30
Bread 'n' butter = £ (2.20 - 1.80) = £0.40
Fried eggs =£ (0.75 - 0.45) = £0.30
Total contribution = 1.70

Average contribution = Total contribution/number of items = 1.70/5 = £0.34