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Profit and Loss

Introduction

In our daily lives, we purchase goods or services from salespeople at the market who also purchase these items from producers or wholesalers. The salesperson sells the goods for a higher but reasonable price to make money. Selling prices must exceed cost prices to turn a profit. If the contrary occurs, there will be a loss.

For example, for a shopkeeper, when a good’s selling price exceeds its cost price, a profit is made; when the cost price exceeds the selling price, a loss results.

This article will define profit and loss, explain how they differ, and explain how to compute profit and loss by solving relevant problems.

What is profit?

Definition

Profit is the amount made by the seller when a product is sold for more than its cost.

One of the undeniable reasons for business is profit. Profit is the term used to describe the financial gain achieved when the revenue from a business activity exceeds the costs. Companies report gross, operational, and net profits for accounting purposes.

Investors are drawn to profitable businesses because they either distribute their profits as dividends to shareholders or invest them back into the company, which raises stock value.

Formula

The simple formula for calculating profit is given by,

P = SP – CP
Profit=Selling Price-Cost Price

where,

P = profit or the amount made by the seller when a product is sold
SP = Selling Price or the cost incurred by the consumer to buy the product
CP = Cost Price or the expenses to make the product

For instance, the total cost of building a dining set table in a furniture shop was \$70. A customer bought the dining set table for \$92. In this scenario, the selling price is \$92 while the cost price is \$70. Since the selling price is greater than the cost price, this transaction has a profit.

Hence, we have,

Profit = Selling Price – Cost Price
Profit = \$92 – \$70
Profit = \$22 Thus, the seller incurred a gain of \$22 from this transaction.

What is loss?

Definition

A loss is incurred by the seller when a product is sold for less than its cost.

Investors and creditors pay close attention when there is a loss for an accounting period since it may indicate that a company’s creditworthiness has declined. This is especially true when a business’s operational activities alone are the only source of the loss.

Formula

The simple formula for calculating loss is given by,

L = CP – SL
Loss=Cost Price-Selling Price

where,

L = loss or when a product is sold for less than its cost.
SP = Selling Price or the cost incurred by the consumer to buy the product
CP = Cost Price or the expenses to make the product

Let us say, for example, in a shoe store, the total expense of making a pair of shoes was \$12. A customer purchased a \$10 pair of shoes. In this scenario, the selling price is \$10, while the cost price is \$12. Since the cost price is greater than the selling price, there is a loss in this transaction.

Hence, we have,

Loss = Cost Price – Selling Price
Loss = \$12 – \$10
Loss = \$2 Thus, the seller incurred a loss of \$2 from this transaction.

Profit and Loss Formulas

The formulas for determining profit and loss when the selling price and cost price are known are as follows.

Profit=Selling Price-Cost Price
Loss=Cost Price-Selling Price

A product is said to have made a profit when its selling price exceeds its cost price. In other words, a product is said to have made a profit if it is sold for more than it costs to purchase.

A product is said to have a loss when its cost exceeds its selling price. Simply put, there is a loss in the transaction if a product is sold for less than its cost to purchase.

Profit vs Loss

The terms profit and loss are used to specify whether a transaction is profitable or not. When the selling price is more than the cost price, the profit is the difference between the two. But a loss is considered to have happened when the cost price exceeds the selling price.

Profit = Selling Price – Cost Price
Loss = Cost Price – Selling Price

Let us use an example where the cost price is \$20, and the selling price is \$25. Since the selling price in this instance is higher than the cost price (SP > CP), we can claim that a profit has been made. In this case, the product was offered for \$5 more than it cost to produce. Profit = Selling Price – Cost Price Profit = \$25 – \$20 Profit = \$5
So, \$5 is the profit made. We can say that a loss happens when the selling price is less than the cost price (SP < CP), for example when the cost price is \$14, and the selling price is \$12. It incurs a \$2 loss.

Loss = Cost Price – Selling Price
Loss = \$14 – \$12
Loss = \$2 Therefore, the transaction results in a loss of \$2.

How to calculate Profit and Loss

Examples (Profit)

Example 1

Calculate the profit made at each of the provided selling prices and cost prices.

( a ) Selling Price = \$60 Cost Price = \$45
( b ) Selling Price = \$120 Cost Price = \$105
( c ) Selling Price = \$450 Cost Price = \$430
( d ) Selling Price = \$1300 Cost Price = \$1296
( e ) Selling Price = \$1420 Cost Price = \$1410

Solution

Each example shows that each transaction results in a profit because the selling price is higher than the cost price. Since we already know the selling and cost prices, let us plug the given into the formula.

Profit=Selling Price-Cost Price

( a ) Selling Price = \$60 Cost Price = \$45

Profit = \$60 – \$45
Profit = \$15 The profit incurred in the transaction is \$15.

( b ) Selling Price = \$120 Cost Price = \$105

Profit = \$120 – \$105
Profit = \$15 The profit incurred in the transaction is \$15.

( c ) Selling Price = \$450 Cost Price = \$430

Profit = \$450 – \$430
Profit = \$20 The profit incurred in the transaction is \$20.

( d ) Selling Price = \$1300 Cost Price = \$1296

Profit = \$1300 – \$1296
Profit = \$4 The profit incurred in the transaction is \$4.

( e ) Selling Price = \$1420 Cost Price = \$1410

Profit = \$1420 – \$1410
Profit = \$10 The profit incurred in the transaction is \$10.

Example 2

A television was bought for \$1750 by a customer. How much profit incurred if the seller got it from his supplier at a price of \$1600?

Solution

The selling price is \$1750, and the cost price is \$1600. Let us substitute the given to the equation to calculate the profit or gain.

Profit or Gain = Selling Price – Cost Price
Profit or Gain = \$1750 – \$1600
Profit or gain = \$150 Therefore, the seller earned a profit of \$150 from this transaction.

Example 3

A store owner costs her \$305 for each box of chocolates he is selling. If he sells each box of chocolates for \$322, how much profit will he earn for each box of chocolates?

Solution

In this problem, the selling price is \$322 while the cost price is \$305. Substituting the given values to the formula, we have,

Profit or Gain = Selling Price – Cost Price
Profit or Gain = \$322 – \$305
Profit or gain = \$17 Therefore, the store owner will earn a profit of \$17 from each sold box of chocolates.

Example 4

A fruit vendor bought 500 apples for \$3500. If the fruit vendor sells each apple for \$10, how much profit will he each make for each apple? How much profit would he earn if he sold all the 500 apples?

Solution

Let us first calculate the cost price for each apple. Let us say that the cost incurred by the selling is just the price he paid for a total of \$3500 for 500 apples. Hence, \$3500 ÷ 500 = \$7. Using \$7 as the cost price of each apple and the selling price of \$10, we have, Profit = Selling Price – Cost Price Profit = \$10 – \$7 Profit = \$3
Therefore, for each sold apple, the fruit vendor will have a profit of \$3. To answer the profit upon selling the 500 apples, let us multiply \$3 by 500. Thus,
\$3 × 500 = \$1500
Hence, the fruit vendor will earn a profit of \$1500 if all 500 apples are sold. Example 5 Decide whether there was a profit made or losses incurred in each of the transactions listed below. Cost price, as well as selling price, are provided. The third column should be labelled with profit or loss. Solution In this practice, it’s important to remember that a transaction results in a profit when the selling price exceeds the cost price, but a loss occurs when the cost price exceeds the selling price. Examples (Loss) Example 1 Calculate the loss in each transaction below, given the selling price and cost price. ( a ) Selling Price = \$12                 Cost Price = \$15 ( b ) Selling Price = \$126               Cost Price = \$130 ( c ) Selling Price = \$350               Cost Price = \$365 ( d ) Selling Price = \$1295             Cost Price = \$1299 ( e ) Selling Price = \$1320             Cost Price = \$1325 Solution Each example shows that each transaction results in a loss because the cost price is higher than the selling price. Since we already know the selling and cost prices, let us plug the given into the formula. Loss=Cost Price-Selling Price ( a ) Selling Price = \$12                 Cost Price = \$15 Loss = \$15 – \$12 Loss = \$3
The transaction incurred a loss of \$3. ( b ) Selling Price = \$126               Cost Price = \$130 Loss = \$130 – \$126 Loss = \$4
The transaction incurred a loss of \$4. ( c ) Selling Price = \$350               Cost Price = \$365 Loss = \$365 – \$350 Loss = \$15
The transaction incurred a loss of \$15. ( d ) Selling Price = \$1295            Cost Price = \$1299 Loss = \$1299 – \$1295 Loss = \$4
The transaction incurred a loss of \$4. ( e ) Selling Price = \$1320 Cost Price = \$1325 Loss = \$1325 – \$1320 Loss = \$5
The transaction incurred a loss of \$5. Example 2 Mario is in buying and selling cars. If a car was sold for \$210000, which he purchased for \$215000, how much did he gain or lose? Solution The problem shows that the selling price is \$210000 while the cost price is \$215000. Since the cost price is greater than the selling price, this transaction incurred a loss. To calculate the incurred loss, let us substitute the given values into the formula. Loss = Cost Price – Selling Price Loss = \$215000 – \$210000 Loss = \$5000
The seller incurred a loss of \$5000 from selling a car. Example 3 A shopkeeper bought a television set from a supplier for \$670. If the shopkeeper sold the television set for \$652, find the profit or loss. Solution The shopkeeper experienced a loss when selling the television because the selling price was lower than the cost price. The cost price is \$670 while the selling price is \$652. To calculate how much loss he incurred, let us substitute the given to the formula, Loss = Cost Price – Selling Price Loss = \$670 – \$652 Loss = \$18

Therefore, the shopkeeper incurred a loss of \$18 from selling the television set. Example 4 A store owner bought a dining table set from a supplier for \$800. Find the profit or loss if he sold the dining table set for \$750. Solution Since the selling price is less than the cost price, then the shopkeeper incurred a loss from selling a television. The cost price is \$800 while the selling price is \$750. To calculate how much loss he incurred, let us substitute the given to the formula, Loss = Cost Price – Selling Price Loss = \$800 – \$750 Loss = \$50

Therefore, the shore owner incurred a loss of \$50 from selling the television set. Example 5 Find the profit or loss on a camera bought for \$550 and sold for \$475. There is a loss because the selling price is less than the cost price. The cost price is \$550 while the selling price is \$475. To calculate how much loss he incurred, let us substitute the given to the formula, Loss = Cost Price – Selling Price Loss = \$550 – \$475 Loss = \$75

Therefore, a loss of \$75 was incurred in this transaction. Example 6 Matilda is in buying and selling jewellery. How much did he gain or lose if the jewellery was sold for \$380, which he purchased for \$400? Solution The problem shows that the selling price is \$380 while the cost price is \$400. Since the cost price is greater than the selling price, this transaction incurred a loss. To calculate the incurred loss, let us substitute the given values into the formula. Loss = Cost Price – Selling Price Loss = \$400 – \$380 Loss = \$20

What distinguishes the selling price from the cost price?

The selling price is the cost incurred by the consumer to buy a product, while the cost price is the expenses to make the product. Costs and selling prices are crucial components in determining a company’s profitability. If a company’s selling price is lower than its cost price, it will experience a loss. A business is considered profitable if the selling price exceeds the cost price.

Let us say, for example, that the owner of a computer store paid \$925 for each computer unit. Following that, each unit was sold for \$1100. The cost price is \$925, and the selling price is \$1100. In this case, the selling price is more than the cost price, demonstrating that the store owner made a profit. The store owner would have lost money if each computer unit was sold for less than \\$925.

Why is selling price important?

Pricing is important because it creates the value required to create and make your products available to buyers justifiably. By examining the selling price, consumers can decide whether an item is valuable enough to spend their time and money on. When choosing what they can buy, customers look at selling prices.