Profitability Position Outdoor Adventures Essay

Question:

Analyze and examine the profitability position of the company ‘Outdoor Adventures’ for the month of March 2018.

Answer:

Introduction

This report undertakes the profitability analysis of Outdoor Adventures for evaluating its performance for the month of March 2018. It also provides suggestions to the company to improve its profitability efficiency on the basis of the performance evaluation.

Profitability Evaluation

The profitability of the company is attributed to the amount of profits attained by it after meeting the cost of sales and expenses from the total income. The amount of profits realized by the company for the period of March 2018 is $39,935.00. It can be analyzed on the basis of profit and loss statement of the company that its net profits attained is expected to increase in the future period of time. The total income realized by the company for the respective period of time is $72,765.00 with total cost of sales to be $23,680.00 and thus the gross profit attained by the company after meeting the cost of sales is $49,085.00. The net profit of the company is attained by meeting up all the operating expenses of $3,500.00 that includes the expenditure incurred in advertisements, rent, wages from the gross profit. The company has realized good net profit after meeting all its expenses relating to cost of sales and operating expenditure (Drake and Fabozzi, 2012). The statements of the profit and loss account developed for the respective period can be demonstrated as follows:

Profit and Loss for Outdoor Adventures for the Period Ending 31 March, 2018

Profit & Loss

11568869- Outdoor Adventures

For the month ended 31 March 2018

Mar-18

Feb-18

Jan-18

Dec-17

YTD

Income

Sales - Accessories

$54,582.00

$0.00

$0.00

$0.00

$54,582.00

Sales - Clothing

$18,183.00

$0.00

$0.00

$0.00

$18,183.00

Total Income

$72,765.00

$0.00

$0.00

$0.00

$72,765.00

Less Cost of Sales

Cost of Sales - Accessories

$12,660.00

$0.00

$0.00

$0.00

$12,660.00

Cost of Sales - Clothing

$11,020.00

$0.00

$0.00

$0.00

$11,020.00

Total Cost of Sales

$23,680.00

$0.00

$0.00

$0.00

$23,680.00

Gross Profit

$49,085.00

$0.00

$0.00

$0.00

$49,085.00

Less Operating Expenses

Advertising

$3,500.00

$0.00

$0.00

$0.00

$3,500.00

Rent

$1,750.00

$0.00

$0.00

$0.00

$1,750.00

Wages and Salaries

$3,900.00

$0.00

$0.00

$0.00

$3,900.00

Total Operating Expenses

$9,150.00

$0.00

$0.00

$0.00

$9,150.00

Net Profit

$39,935.00

$0.00

$0.00

$0.00

$39,935.00

Profitability Ratio Analysis

The profitability ratio’s analyzes the ability of a company to realize profits through the use of the assets. The profitability position of the company can be evaluated through the calculation of the profitability ratios of gross profit and net profit.

Gross Profit Ratio

The ratio depicts the revenue realized by the company after meeting the cost of sales from the sales income (Bull, 2007). It depicts the profits realized by the company after meeting the production expenses and can be calculated through the use of following formula:


Gross Profit Ratio=Gross Profit/Net Sales

Gross Profit Ratio=$49,085.00/$72,765.00

Gross Profit Ratio=0.68

Thus, it can be stated after calculating the gross profit ration fro the respective period that the company is in good financial position as it has higher percentage of gross profit and its cost of sales is maintained at a lower level.

Net Profit Ratio

The ratio determines the ability of a company to remain profitable after meeting all the operating expenses related to administration and wages (Bull, 2007). The formula used for calculating the net profit ratio is as follows:

Net Profit Ratio=Net Income/Total Sales

Net Profit Ratio=$39,935.00/$72,765.00

Net Profit Ratio=0.54%

The company has maintained a good net profit percentage for the respective period after meeting all its operating expenses successfully.

Recommendations

  • The company can improve its profitability position through reducing its production cost incurred in purchase of materials and direct labor.
  • The company is recommended to maintain a long-term relation with suppliers and labor for decreeing the production cost (Wild, 2006)
  • It should also keep a check on its inventory level on a continuous basis to minimize the inventory holding cost and improving the profitability position
  • It is also recommended to improve its operational efficiency through reducing the expenditure related to advertisement and rent
  • It should also emphasizes on improving its sales position through the use of free add-on-sales (Bragg, 2012)

Conclusion

It can be stated from the profitability analysis of the company that it is currently in a good state of financial position as it is able to realize good profits after meeting all its production and operational expenditures.

Reference

Bragg, S. 2012. Financial Analysis: A Controller's Guide. John Wiley & Sons.

Bull, R. 2007. Financial Ratios: How to use financial ratios to maximise value and success for your business'. Elsevier.

Drake, P. P. and Fabozzi, F. J. 2012. Analysis of Financial Statements. John Wiley & Sons.

Wild. 2006. Financial Statement Analysis 9E. Tata McGraw-Hill Education.

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