Business – 10.2 Analysis of published accounts – Profitability ratios | e-Consult
10.2 Analysis of published accounts – Profitability ratios (1 questions)
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Step‑by‑step calculation:
- Gross profit = Sales – Variable costs = £420,000 – £210,000 = £210,000.
- Operating profit = Gross profit – Fixed costs = £210,000 – £120,000 = £90,000.
- Profit before tax = Operating profit – Interest expense = £90,000 – £15,000 = £75,000.
- Tax = £13,000 (given).
Net profit = Profit before tax – Tax = £75,000 – £13,000 = £62,000.
- Net profit margin = (Net profit ÷ Sales) × 100 = (£62,000 ÷ £420,000) × 100 ≈ 14.8%.
Interpretation: A net profit margin of roughly 15% means that for every £1 of sales the retailer retains about 15 pence as profit after all costs, interest and tax. This is a healthy margin for a retail operation, suggesting effective cost control and pricing strategy. However, the margin should be compared with industry benchmarks; if competitors achieve higher margins, there may still be scope to improve efficiency.