Use profit-or-loss information in a business decision
Compare simple statement figures across products or periods while checking trends, costs and what the statement omits.
Cambridge IGCSE Business 0264, 2027–2029 syllabus, Topic 5. Use the supplied data and show calculation steps. Candidates are not assessed on constructing cash-flow forecasts or financial statements. Written practice is self-checked and does not certify exam readiness
Before you begin
- No previous finance study is assumed. Identify the time period, whether a figure is a stock or a flow, and the units before calculating or recommending.
Work on paper. Try each question before revealing help, and explain why your method works.
Quick readiness check
Which figure shows the surplus after total costs in a simple statement?
What you will learn
- Interpret statement figures
- Compare profit with revenue and costs
- Justify a decision with limitations
Compare like with like
A simple statement of profit or loss can help compare revenue, cost of sales, gross profit, expenses and profit. Ensure figures relate to the same period and use consistent categories before drawing a conclusion.
A higher revenue does not necessarily mean higher profit; cost of sales and expenses also matter. A percentage margin can support comparison where businesses or periods differ in scale, but this lesson's account ratios are developed separately.
Use the statement as one source
A manager may use the figures to consider price, supplier cost or product continuation. The statement does not by itself reveal customer demand, cash timing, capacity constraints or how shared costs were allocated.
A recommendation should use the figures to establish a result, explain a plausible action and state one relevant limitation or additional piece of evidence. Do not treat a single period as a guaranteed forecast.
Pause and explain
Why may a profitable product still need further investigation before expansion?
Worked example
A product's revenue is $100,000 and its total costs are $94,000. A new supplier may reduce cost by $3,000 but requires a lower-quality material. What does the profit figure show, and what else should the manager assess?
Show the worked solution
- Current profit is 100,000 − 94,000 = 6,000.
- The saving could raise profit if other figures remain unchanged.
- Assess quality, returns, customer response and supplier reliability.
Answer Current profit is $6,000. A $3,000 saving could increase profit if costs and revenue otherwise stay unchanged, but the manager should test material quality, returns and customer response because a lower-cost input may reduce sales or increase defects.
Try a topic test
Choose Easy, Normal or Difficult. Save your answers and open worked review after finishing.
Test this topic →From guided practice to a new situation
Write your answer and reasoning first. Use a hint only if you are stuck. The model solution is for self-checking; your written work is not automatically marked.
Product X revenue is $48,000, cost of sales $29,000 and expenses $11,000. Calculate profit and explain one reason not to decide from profit alone.
Give me a hint
Deduct cost of sales, then expenses.
Compare my reasoning
- Gross profit = 48,000 − 29,000 = 19,000.
- Profit = 19,000 − 11,000 = 8,000.
- Check demand, cash or capacity before expanding.
Profit is $8,000. The figure does not show whether demand can grow, whether cash is available or whether production capacity can support expansion, so more evidence is needed.
Look for these in your work
- Gross profit correct
- Profit correct
- Further evidence relevant
A shop's revenue rises 12% but its profit falls. Give two cost-related explanations that could be checked.
Give me a hint
Higher revenue can be outweighed by a faster increase in cost of sales or expenses.
Compare my reasoning
- Supplier or material costs may have risen.
- Wages, rent, delivery or promotion expenses may have increased.
- Compare costs for the same periods and categories.
Cost of sales may have risen faster than revenue, reducing gross profit, or expenses such as wages and delivery may have increased. The shop should compare consistent periods and identify which category changed before choosing a response.
Look for these in your work
- Two cost explanations
- Profit relationship understood
- Comparable data requested
Two product lines show profits of $14,000 and $11,000. The second supports a fast-growing customer group and has unused capacity. Explain how a manager could make a balanced decision.
Give me a hint
Use current profit, but weigh future demand and capacity evidence.
Compare my reasoning
- Product 1 currently has the higher profit by $3,000.
- Product 2 may offer growth and use spare capacity.
- Compare investment, expected contribution and forecast uncertainty.
The first line currently earns $3,000 more profit, but the second may serve growing demand and use spare capacity. The manager should compare the investment and expected future cash or profit, test demand evidence and account for uncertainty before deciding.
Look for these in your work
- Current figures compared
- Strategic context used
- Uncertainty acknowledged
Common mistakes
- Choosing the product with highest revenue automatically
- Assuming a cost reduction leaves sales unchanged
- Ignoring statement-period and allocation differences
What can you explain now?
Which figure shows the surplus after total costs in a simple statement?
Compare with the explanation
Profit
Profit is revenue after costs have been deducted.
After trying it yourself, choose your next review. This is your self-assessment.
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Make it stick
Why is revenue alone a weak basis for deciding which product to continue?
If you needed the solution, close it and solve the problem again from a blank page. A correct answer is stronger when you can explain the reason for each step.