How To Make More Profit

09/10/2010 revised

I recognized an accurate way of calculating a profit rate, which salespersons need to know in their business.

What is a profit? We should go back to Econ10:

(1) (Profit) = (Revenue) - (Cost)

=(Selling Price)×(Goods) - (Cost Per Good)×(Goods)

= {(Selling Price) - (Cost Per Good)}×(Goods)

And what is a profit rate?

(2) (Profit rate) = {(Selling Price) - (Cost)}/(Selling Price)

The above math is easy to tackle. However, a calculation related to a decimal should be necessary to take a good care for; a cup of tea sells for $10 in your cafeteria (You don't have to say it is too expensive, but it's just an example to make myself understood easily!) and its cost is $5.

What is the fraction that they can take? What do you think is the profit rate?

(Profit rate) = (10-5)/10=0.5

This tells that just a half of the selling price is what they can take.

Consider this case: I would like to add a 50% profit to the cost of a cup of tea and find the selling price. We can get it by increasing the cost by 50%. It's easy to calculate:

(Selling Price) = (Cost)×(1+Profit Rate)

In this way I get 7.5: (Selling Price)=5×(1+0.5)=7.5

It is less than the above selling price, $10. Why? If we want to find the reason, we must solve the selling price from (1):

(3) (Selling Price) = (Cost)/{1-(Profit Rate)}

Now I get $10 by selling a cup of tea. This is one of the frequent miscalculations. To sum up, if you want to get 50% profit, do not multiply the cost by the gross profit rate, (1+Profit Rate), but divide it by (1-Profit Rate). Otherwise you will lose a big money in your business.