Profit margin formula is used to calculate how much profit a product or business is. It is probably the most important tool 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 net income is divided by net sales. Thus, the formula for profit margin is:
|Profit Margin = (Net Income / Net Sales) × 100|
Gross Profit Margin Formula
The gross profit margin formula is derived by dividing the difference between revenue and cost of goods sold by the net sales.
|∴ Gross Profit Margin = (Gross Profit / Net Sales) × 100|
Gross profit = Revenue – Cost Of Goods Sold
Also Check: Profit Calculator
Solved Examples Using Formula for Profit Margin
Question 1: 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. 50
Profit Margin = (Net Profit ⁄ Net Sale) × 100
Profit Margin = (50 ⁄ 150) × 100
Profit Margin = 0.33 × 100
Hence, Profit Margin = 33.33%
Question 2: If the gross profit of a company is Rs. 500,000 on a net sales of Rs. 700,000, then find the gross profit margin of the company.
Gross profit = Rs. 500,000
Net sales = Rs. 700,000
Gross profit margin = (Gross profit/Net sales) × 100
= (Rs. 500,000/Rs. 700,000) × 100