Average Profit Formula
Average profit concept is widely used in many calculations especially
for calculating the accounting rate of return. Accounting rate of return is an
effective decision making tool for the organization. Average profit provides the average expected performance.
= Sum of profit for n years/Number of years
Average profit Formula Example
ABC & Company reported the following profit for the last
five year .Calculate the average profit
|
Year 1
|
$ 50,000
|
|
Year 2
|
$ 55,000
|
|
Year 3
|
$ 60,000
|
|
Year 4
|
$ 70,000
|
|
Year 5
|
$ 45,000
|
Solution
|
Year 1
|
$ 50,000
|
|
Year 2
|
$ 55,000
|
|
Year 3
|
$ 60,000
|
|
Year 4
|
$ 70,000
|
|
Year 5
|
$ 45,000
|
|
Sum of profit
|
$ 280,000
|
Average
profit = $ 280,000/5 (Years)
= 56,000 (average profit)
Average profit & Accounting Rate
of Return
Average profit is important component for calculating the
Average rate of return and average rate of return is calculated by dividing the
average profit with average investment i.e. Average Profit/Average Investment.
If we assume
the average investment for above example is $ 200,000, then accounting rate of return
may be calculated as under:
= $ 56,000/$200,000 x 100
= 28%
