How to Calculate Product Profitability

When you have a product, you want to maximize the amount of money you make selling the product. To do this, you want to increase product profitability. The product profitability consists of your revenue from the product and the amount it costs to make a sales. Knowing the profitability of a product also allows you to compare different products. For example, if one product is more profitable than another product, you could shift your production to the more profitable product.

Calculate your total revenues from the product. For example, a company sells 500 widgets for $2 each. Total revenues, then, equals 500 widgets times $2, or $1,000.

Calculate the total costs to manufacture the product. This involves direct costs, such as material used to manufacture the costs. Depending on the level of detail you want, you can also include indirect costs that you can allocate to the production of different units, such as the cost of a secretary who is indirectly involved in multiple production since she does not work on a specific product. In the example, the company assigns $700 of costs to produce the product.

Subtract the cost to produce the product from the revenues of the product. In the example, the products profitability is $1,000 minus $700, which equals $300. If you want to look at this at a per product sold, then you divide the product profitability by the number of products produced. Therefore, $300 divided by 500 units equals a profitability of $0.60 per unit.