Profit and loss
For business owners and managers, it is important to know whether the business is making or losing money. In other words, it is important to know whether there is a profit or a loss.
In this section, we'll look at how to calculate profits and losses, as well as how to calculate the percentage profit or loss.
Cost price (or buying price): The price that is paid for the item.
Selling price: The price that the item is sold for.
Marked price: The price labelled on the item.
Profit: If more money is earned than than is spent, the extra amount earned is a profit.
Loss: If more money is spent than is earned, the extra amount spent is a loss.
Break-even point: If exactly the same amount of money is earned and spent, then there is no profit or loss. This is called the break-even point.
Revenue: another name for income or money that is earned by a business.
Calculating profit or loss
To calculate whether a business will register a profit or a loss, first calculate the gross income for the business (i.e. the total amount earned), as well as the total expenses for the business. Then subtract the two amounts:
$\text{Gross income}-\text{Total expenses}=\text{Profit or Loss}$Gross income−Total expenses=Profit or Loss
Note that a loss can also be expressed as a negative profit, which is reflected in the formula above. For example, a profit of $-\$1200$−$1200 would actually mean a loss of $\$1200$$1200.
We can also use this formula to calculate the total expenses, if we know our revenue and our profit. We just substitute the values we know to work out the one that we don't.
Calculating percentage profit or loss
It is common to express a profit or loss from a sale as a percentage of the cost price. To do so, we first write the profit or loss as a fraction of the cost price, then convert the fraction to a percentage:
$\text{Percentage Profit/Loss}=\frac{\text{Profit/Loss }}{\text{Cost Price}}\times100%$Percentage Profit/Loss=Profit/Loss Cost Price×100%
This can be helpful as it gives a good indication of the relative amount earned. For example, making $\$100$$100 profit sounds good in isolation, but is it really that good if you sold the item for $\$100000$$100000 and only made $\$100$$100 profit?
Practice questions
Question 1
Amelia bought a truck for $\$17300$$17300 and sold it four years later, making a loss of $25%$25%. How much did she sell it for?
Question 2
Xavier bought a property for $\$371000$$371000. In the first year, it increased in value by $12%$12%, but in the second year, it decreased in value by $6%$6%. If running costs during the two years amounted to $\$1500$$1500, find Xavier’s profit or loss at the end of two years.
First, calculate the amount Xavier earned from the changing value of the property. Give your answer correct to the nearest cent.
Now calculate Xavier's total profit. Give your answer correct to the nearest cent.