Net profit
This profit is calculated by deducting all expenses away from gross profit. is the difference between the amount of money received from selling goods and services and all of the costs incurred in order to make them. Net profit is often considered to be the more important The amount of money made after all expenses have been paid. figure, as it includes all of the Fixed costs are expenses a business has to pay which do not change with output, eg rent. and other The fixed costs that come from running an office, shop or factory, which are not affected by the number of specific products or services that are sold. that a business has to pay.
Net profit can be negative, which would indicate that a business has made a loss, since its costs are greater than its The money received from selling goods and services..
Calculating net profit
In order to calculate net profit, a business will use the following formula:
Net profit = gross profit − other operating expenses and interest
For example, the business that produces bottled water would use the operating expenses listed below to calculate its daily net profit:
The net profit per day is:
£5,000 − £4,525 = £475
Question
One year, a biscuit factory produces and sells £1,000,000 worth of products. The cost of making the biscuits it sells is £200,000. During the year, the factory also incurs the following costs:
- staffing costs of £750,000
- energy costs of £10,000
- insurance cost of £2,500
- rent of £50,000
How much net profit does the biscuit factory make during the year?
Gross profit = sales revenue − cost of sales
= £1,000,000 − £200,000
= £800,000
Net profit = gross profit − other operating expenses and interest
= £800,000 − (£750,000 + £10,000 + £2,500 + £50,000)
= £800,000 − £812,500
= −£12,500
The biscuit factory makes a loss of £12,500 during the year.
