new business module

INTRODUCTION TO BUSINESS 19
Exercise: Profit calculation (see Hand-outs 6 and 7)
Every Tuesday and Friday, Magomed sells traditional sweets on the central market, where
he rents a little market stand for $40 per week. The market fee is $12 per month.
Magomed wants to calculate the profit he made in the month of June. He keeps a record
of all his sales and expenditures: he spent $120 on ingredients, $55 on packaging, and $22
for electricity. He also bought eight cardboard boxes for $5 each to transport his sweets
to the market.
Magomed produces his sweets at home. On the two market days he takes a taxi to transport
his output to the market and sell it. The taxi costs $7 each way.
Magomed sells small and large packages of sweets. In June he worked 8 days and sold 205
small packages for $2 each and 123 large packages for $3 each. Magomed was able to sell
his entire June output.
Magomed’s income for June was:
(205 small packages x $2) + (123 large packages x $3) = $779 income
Magomed’s costs in June were:
(market stand 4 weeks x $40) + $12 market fee + $120 ingredients + $55 packaging
+ $22 electricity + (8 cardboard boxes x $5) + (16 taxi trips x $7) = $521 in costs
Magomed’s profit for June was:
$779 income – $521 in cost = $258 in profit
Note:
For participants with limited numerical skills, you can use Hand-outs 6a and 7a, which
present a simpler example that refers to a single week.
1.7 Maximizing profit (optional)
The purpose of a business is to maximize profit, not just to
cover costs. Running a business is about generating maximum
revenues at minimum cost. The higher the volume of sales and
the greater the profit margin of a product, the more income a
business activity generates. 3
The profit margin is the positive difference between sales price
and the total cost of a product:
• Profit margin: sales price – product cost
Thus, increasing the sales price or lowering the product cost
will always improve the profit margin.
3 The term product is used to represent both goods and services.