How do you calculate profit margin?
When you are in management, you always face an indicator called profit margin. Do you understand the profit margin correctly?
This article is for business owners or managers who want to know about the concept of profit, how to calculate the profit margin, and points to improve the profit margin.
What is the profit margin?
What is the meaning of the term "profit"? Profit is the amount of money obtained by subtracting expenses from sales.
If your expenses are greater than your income, it is a loss. This is the general definition of profit, but there are many different types of profit in management.
How to calculate profit margin
The formula for calculating profit margin is as follows:
Profit margin (%) = profit ÷ selling price x 100
Profit margin calculation examples
Determine the selling price with a profit margin of 25%.
How would you calculate the selling price if you received such instruction from your boss?
Let's take a look at the example below.
Let's say you purchased a product for $1,200.
What would be the selling price to sell this product at a profit margin of 25%?
Since you purchased the product for $1,200, the cost of goods is $1,200.
The profit margin is the percentage of profit when the selling price is 100%.
Since the profit margin is 25%, the cost to income ratio is 75% based on the following formula:
100％－25％＝75％
The first step is to calculate the selling price.
We will use the proportional formula.
Let's say the selling price is X. The 75% portion is $1,200.
Therefore,
100% : 75% = X : $1,200
There is a property that the product of the inner term and the outer term of a proportional expression are equal.
75% × X = 100% × $1,200
0.75X = $1,200
X = 1,600
The selling price will be 1,600.
Let's calculate the profit as follows:
Profit = $1,600 (selling price) - $1,200 (cost price) = $400
Then, calculate the profit margin as follows:
Profit margin = 400 (profit) ÷ 1,600 (selling price) x 100 = 25%
Let's take a look at another example below.
Out of revenue of $20,000, if the costs are $15,000, the profit is $5,000. The profit margin is calculated by dividing the profit by the revenue x 100. In this case, the profit margin would be 5,000 ÷ 20,000 x 100 = 25%.
Refer to the article below if you want to learn how to calculate gross profit.
Summary
This article explained how to calculate profit margin with examples.
The profit margin is a percentage of revenue that indicates how much profit is available. It is an important indicator when thinking about business planning and performance.