Profit Margin Formula

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 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 revenue.

∴ Gross Profit Margin = (Gross Profit / Net Sales) × 100

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.

Solution:

Given,

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.

Solution:
Given.
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
= 71.42%

Read More:

Leave a Comment

Your email address will not be published. Required fields are marked *