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Profit Margin Formula
The profit margin formula is used to find the profit margin in a sale. Profit margin is defined as the revenue generated excluding the expenses divided by the revenue generated. It is the ratio of net sale subtracted by the cost of goods sold, cost of raw material, wages of workers, etc, and net sale. Profit margin is the ratio of the difference of revenue and cost with the revenue multiplied by 100. The profit margin is shown as a percentage. Let us see the profit margin formula along with the solved examples.
What is Profit Margin Formula?
The profit margin formula is further divided into two formulas of gross profit margin formula and net profit margin formula which are explained below the profit margin formula. The profit margin formula can be given as:
Profit Margin Formula = ((Revenue - Cost of Goods Sold)/ Revenue) × 100
Two main profit margins are net profit margin and gross profit margin. The formula for both the profit margins are listed below:
- Gross Profit Margin = (Gross Profit/Revenue) × 100
- Net Profit Margin = (Net Profit/Revenue) × 100
Examples Using Profit Margin Formula
Example 1: The gross profit of a company is $500,000 with revenue of $700,000. Find the gross profit margin of the company.
Gross profit = Rs. 500,000
Net sales = Rs. 700,000
Gross Profit Margin = (Gross Profit/Revenue) × 100
= (Rs. 500,000/Rs. 700,000) × 100
Answer: Gross Profit Margin for the company is 71.43%.
Example 2: Given below the income statement of a company:
Revenue = Rs 7,20,000
Gross Profit = Rs 3,00,000
Net Income = Rs 50,000
Find the Net Profit Margin and Gross Profit Margin of the company using the profit margin formula.
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%
Answer: Net Profit Margin of the company is 6.94% and its Gross Profit Margin is 41.67%.
Example 3: Sam bought 1500 articles for $17000. He sold those articles for $21000. Find the gross profit margin for the articles using the profit margin formula.
Given: Revenue = 21000
Cost of goods sold = 17000
To Find: Gross Profit Margin
Using Profit Margin Formula:
(Gross Profit/Revenue) × 100 = (21000-17000)/ 21000 × 100 = 4000/21000 × 100 = 19.05%
Answer: Gross Profit Margin for the articles is 19.05%.
FAQs on Profit Margin Formula
What Is Profit Margin Formula?
Profit margin is defined as the revenue generated excluding the expenses divided by the revenue generated. The profit margin formula can be given as Profit Margin Formula = ((Revenue - Cost of Goods Sold))/ Revenue) × 100
How Do We Calculate Profit Margin?
To find the margin, divide gross profit by the revenue. To show it as a percentage, multiply the result by 100.
What Is the Meaning of Profit Margin?
Profit margin measures the profitability of a company or a business activity, essentially by dividing income by revenues. Profit margin usually expressed as a percentage indicates how much profit has been generated.
What Is a Good Profit Margin Ratio?
Generally, a 10% net profit margin is considered average profit margin, whereas a profit margin of 20% or above is considered high.