In business, you have to know where your profits lie. This means knowing what part of your sales price is profit and what part is used to pay back the cost of the goods. The profit margin tells you just that. Expressed in percentage format, profit margin tells you what percentage of the sales price is actually profit. You can further take an average of these profit margins to produce a more representative expression of profit. This might be done to average profit margins among various time frames, products or between companies, such as writing a business proposal where you wish to express the industry profit potential.
Determine the cost of the product. This is the actual expense associated with the product, such as your purchase price and advertising.
Determine the sales price for the product.
Subtract the cost from the sales price and then divide by the sales price to determine the product's profit margin. You then multiply the decimal by 100 to convert to a percentage. As an example, the profit margin on a $100 item that costs $70 to produce would be calculated as $100 minus $70, which equals $30, divided by $100 gives you a profit margin of 30 percent.
Add all the profit margins together and then divide by the number of them. If you calculated a profit margin of 30, 40, 35 and 35 percent among your four products, you would average the profit margins as 30 plus 40 plus 35 plus 35, and then divide that figure by four. Therefore, your average profit margin among your products is 35 percent.
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- America's SBDC. “Profit Margin Formula.” Accessed June 9, 2020.
- Corporate Finance Institute. “Profit Margin.” Accessed June 9, 2020.
- Corporate Finance Institute. “Gross Margin Ratio.” Accessed June 9, 2020.
- Corporate Finance Institute. “Operating Profit Margin.” Accessed June 9, 2020.
- Corporate Finance Institute. “Net Profit Margin.” Accessed June 9, 2020.
- Bureau of Economic Analysis. “Activities of U.S. Multinational Enterprises: 2016,” Page 2. Accessed June 9, 2020.
- Intuit QuickBooks. “What Are the Different Pricing Strategies?” Accessed June 9, 2020.