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Your
profit is determined by the interaction of quantity,
price, variable costs and fixed costs within
your business. If you have 500 customers who buy an average
of 10 items this month, your monthly quantity
is 5,000 items. When your average price
is $20, your monthly sales volume will be $100,000.
If each item you
sell this month costs you an average of $14.95 to buy or
make, your monthly variable costs are $74,750.
This gives you a gross profit of $25,250. Your
gross profit margin would be 25.25%.
Perhaps you have
fixed costs this month for rent, wages,
insurance, etc. of $15,250. This gives you a net profit
of $10,000 for the month. Your net profit margin
would be 10%.
By
making small changes in each of these four elements of
perhaps 5%, you can create a substantial increase in your
net profit. For the example on the next page we project
a 5% increase in both quantity and price, thus a factor
increase of 1.05. We project
a 5% decrease in both variable costs and fixed costs,
thus a factor decrease of .95.
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