Profit Margin Formula
Profit Margin Formula
The Profit Margin in a sale is calculated using the Profit Margin Formula. The revenue earned minus the costs is divided by the revenue generated to determine the profit margin. It is the ratio of net sales less the cost of products sold, cost of raw materials, cost of labour, and other expenses. The Profit Margin Formula is calculated as the ratio of the difference between revenue and cost multiplied by 100. A percentage is used to represent the profit margin. Students can take a look at the Profit Margin Formula and cases that have been solved on the Extramarks website and mobile application.
The Profit Margin Formula solutions by Extramarks experts are very descriptive, detailed and comprehensive that make sure to cater to all student needs.
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What is Profit Margin Formula?
The Gross Profit Margin Formula and the net Profit Margin Formula, which are both discussed below the Profit Margin Formula, are further separated into two formulae. The Profit Margin Formula is as follows:
The formula for Calculating Profit Margin:
(Revenue – Cost of Goods Sold)/Revenue) x 100
Net profit margin and gross profit margin are the two primary profit margins. Below is a list of the formulas for both profit margins:
(Gross Profit/Revenue) 100 = Gross Profit Margin
(Net Profit/Revenue) 100 = Net Profit Margin
The solutions and notes based on the Profit Margin Formula include solutions to exercises given in the NCERT book. Examples have been provided wherever needed in Extramarks’ Profit Margin Formula notes. With the help of these solutions based on the Profit Margin Formula, students will be able to clarify any doubt that prevails in their version of the concept. These notes on the Profit Margin Formula are extremely helpful for board examinations.
Examples Using Profit Margin Formula
Example 1: A company’s sales are $700,000 and its gross profit is $500,000. Discover the company’s gross profit margin.
Gross profit = Rs. 500,000
Net sales = Rs. 700,000
Gross Profit Margin = (Gross Profit/Revenue) × 100
= (Rs. 500,000/Rs. 700,000) × 100
The company’s gross profit margin is 71.43%.
Figure 2: The company’s income statement is shown below:
Revenue = Rs 7,20,000
Gross Profit = Rs 3,00,000
Net Income = Rs 50,000
Using the profit margin formula, get the company’s Net Profit Margin and Gross Profit Margin.
Revenue = 7,20,000
Gross Profit = 3,00,000
Net Income = 50,000
To Find: Net Profit Margin and Gross Profit Margin
Using Profit Margin Formula:
Gross Profit Margin = (Gross Profit/Revenue) × 100 = 300000/720000 × 100 = 41.67%
Net Profit Margin = Net Profit/ Revenue × 100
= 50000/ 720000 × 100 = 6.94%
The company’s gross profit margin is 41.67%, while its net profit margin is 6.94%.
Example 3: Sam spent $17,000 on 1500 items. He received $21000 for the items. Using the profit margin formula, get the articles’ gross profit margin.
Given: Income = 21,000
1700 is the cost of the products sold.
To find: Using the profit margin formula, calculate the gross profit margin.
(Gross Profit/Revenue)/100 = (21000-17000)/21000/100 = 4000/21000/100 = 19.05%
The articles’ gross profit margin is 19.05%.
FAQs (Frequently Asked Questions)
1. What does "Profit Margin" Mean?
Profit margin, which is calculated by dividing income by revenues, effectively determines how profitable a firm or commercial activity is. How much profit has been made is often stated as a percentage called profit margin.
2. How do you calculate Profit Margin?
The revenue earned minus the costs is divided by the revenue generated to determine the profit margin. Profit Margin Formula = ((Revenue – Cost of Goods Sold))/ Revenue) 100 is one way to express the Profit Margin Formula.
3. How are Profit Margins calculated?
Divide gross profit by revenue to get the margin. Multiply the outcome by 100 to display it as a percentage.
4. What is a good ratio for Profit Margin?
In general, a net profit margin of 10% is regarded as ordinary, whereas a profit margin of 20% or above is regarded as high.