What is average profit? This is an index that investors and businesses are interested in, reflecting the performance of the business. In the following article, MISA meInvoice will share full content and detailed formula for calculating average profit.
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1. What is average profit?
2. What is the purpose of determining average profit?
3. How is average profit determined?
1. What is average profit?
Average Profit is an index reflecting the profit level achieved per unit of product produced or consumed in the market. Average profit is determined by the average total revenue minus the total costs incurred in
a certain period of time.
The average profit index reflects the difference between the cost of production and the price the buyer has to pay for the product, and also provides an overview of the amount of money that the business earns from selling products/services, thereby assessing whether the profit earned is greater than the cost that the business has to pay. In addition, this is also an important index to evaluate the profitability and indicate the level of efficiency of the business.
The average profit of different industries depends on different factors, of which the two main influencing factors are average cost and average revenue. Specifically:
Average Revenue: Total revenue divided by the number of units of product sold in the market during a given period of time.
Average cost: Is the total cost incurred divided by the number of units of product produced and sold to the market.
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2. What is the purpose of determining average profit?
Make business decisions easily
Through the average profit index, businesses can easily make business decisions, especially in difficult times.
The business will calculate the average profit on a product, evaluate the profitability of that product and decide whether to change that product or not.
For example: Company X sells air conditioners in Lam Dong. Company X will use the average profit to determine how much profit air conditioners in Lam Dong bring in on average compared to other provinces/cities.
In case the weather here is cool, the demand for air conditioning is not high and the average profit is low, then company X needs to consider whether to change the products it is selling or not.
Evaluate the effectiveness of business operations
Through the average profit index, businesses can assess whether the business is operating effectively or not, especially in the stages of development or difficulty. This has a strong impact on the business strategies of the business.
If the average profit index is not positive, the business needs to have a plan to improve business strategy or change products… to ensure stable business operations.
average profit meaning
Assess the real value of the business
Before investing or acquiring a business, investors will consider the average profit index to evaluate the growth potential of that business. High average profit helps investors easily receive profits through mergers or acquisitions.
Average Revenue = Total Revenue/Total Units Sold in a Given Period
Average cost = Total cost/Total units sold in a given period of time
Thus, based on the above formula, it is easy to determine the average profit of a product, a stock or a business. Specifically:
