Profit margin formula is used to calculate how much profitable a product or business is. It is probably the most important margin used by businesses to know the total profit percentage over a period of time. It is also known as net profit margin, net profit ratio or net margin in business terms.
When net profit is divided by sales, the product we get is the profit margin. Profit margin and gross profit margin terms are usually used by small companies for comparing similar industries. It is denoted in percentage. The more the profit margin is, the more profitable the business will be.
Profit Margin Formula
To get the profit margin, the total income is divided by total sales. Thus, the formula for profit margin is:
|Profit Margin = (Total Income / Net Sales)|
Gross Profit Margin Formula
The gross profit margin formula is derived by dividing the difference between revenue and cost of goods sold by the revenue.
|∴ Gross Profit Margin = (Gross Profit / Net Sales)|
Also Check: Profit Calculator
Solved Examples Using Formula for Profit Margin
Question: Find the profit margin when you buy a pen for Rs. 100 and sell it for Rs. 150.
Net Sale = Rs.150
Net Profit = Rs. 150 – Rs. 100 = Rs. 150
Profit Margin = (Net Sale ⁄ Net Profit)
Profit Margin = (50 ⁄ 150)
Profit Margin = 0.33
Hence, the Percentage of Profit Margin = 33.33%