How do I calculate the profit margin?

The profit margin can be found by dividing profit by revenue, as follows:

Profit margin = profit / revenue x 100% = (revenue or sales – total costs) / revenue or sales x 100%. There are three types or levels of profit margin, which are:

Gross Profit Margin: Gross profit is the simplest measure of profit, and it includes revenues minus the cost of producing and purchasing goods, services, and expenditures that are directly related to their production, including materials.

Taxes, benefits, operating costs, and one-time expenditures such as the purchase of equipment expenses are not included in the calculation of gross profit, and the gross profit margin, which represents the percentage of profits in relation to revenues, can be calculated after deducting all of its expenditures on production by finding a sum. Divide gross profit by total revenue, as follows:

Gross profit margin = gross profit / sales x 100% = (net sales – prices of goods and production costs) / net sales) x 100% operating profit margin: it is considered more Complication of gross profit, which includes revenues minus all general, operating, daily expenses required to run a business, and depreciation expenses, but does not include non-operating expenses; Such as taxes and interest, by dividing the operating profit on revenues, as follows:

Operating Profit Margin = (Net Sales – Operating Costs – Goods Prices and Production Costs) / Revenues) x 100% = (Operating Profit / Revenue) x 100.

Net Profit Margin:

It expresses the real profit of the company and includes the remaining revenues After subtracting all expenses, including commodity prices, operating expenses, taxes, and interest, the net profit margin reflects the company’s ability to convert income into profit, and it represents the percentage of profits in relation to revenues after deducting all expenses, and it can be calculated as follows:

Net profit margin = ((Revenue – Goods Prices – Operating Costs – Any Other Costs – Taxes – Interest) / Revenue) x 100%, or Net Profit Margin = (Net Profit / Revenue) x 100%. Note: The profit margin varies in different industries, and its size, as well as affected by a group of other factors, and it indicates the quality of the company’s performance in general, and its ability to convert income into profits, as mentioned previously, and in general if the net profit margin is equal to 10%, it is considered average.

And if it is 20%, then it is considered high or good, but if it is 5%, it is considered low.

Various examples about the profit margin

The first example: A company recorded revenues of $ 21.32 billion, and the total profit was equal to $ 12.8 billion. And $ 4.17 billion, respectively, and if the net profit equals $ 2.82 billion, what is the profit margin for each of the three types of profit? [2] Solution: Profit margin = (profit / revenue) x 100% gross profit margin = ( 12.8 / 21.32) x 100% = 60.07%. Operating profit margin = (4.17 / 21.32) x 100% = 19.57%.

Net profit margin = (2.82 / 21.32) x 100% = 13.22%.

The second example:

If the revenue of a shirt-selling company in 2018 is equal to $ 700,000, and the cost of goods sold i.e. the direct cost of producing the shirts is equal to $ 200,000, and the cost of all other operating expenses including interest and taxes is $ 400,000, then what is the gross margin Profit and net profit margin during 2018?

The solution: Gross profit = (revenue – goods prices) = $ 700,000 – $ 200,000 = $ 500,000. Gross Profit Margin = Gross Profit / Revenue = (500K / 700K) x 100% = 71.4%. Net profit = Gross profit – all operating expenses = $ 500,000 – $ 400,000 = $ 100,000.

Net Profit Margin = Net Profit / Revenue X 100% = $ 100K / $ 700K = 14.3%.

Third example:

A woman bought five boxes of eggs for 10 piasters per egg inside the box, then sold each box for 2 dinars, so what is the profit margin in selling them, given that each box contains 12 eggs? [4] The solution: profit margin = profit / Revenue Profit = Selling Price (represents revenue) – Purchase price. The selling price can be found as follows: Sale price = the number of funds x price per fund = 2 x 5 = 10 dinars. Finding the purchase price is as follows: Purchase price = number of boxes x number of eggs in each box x price of one egg = 5 x 12 x 0.1 = 6 dinars. Profit = 6-10 = 4 dinars. Profit margin = (4/10) x 100% = 40%.

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