Direct margin is a ratio that expresses the amount of profit earned by selling an item. Businesses state direct margins as percentages and commonly use this ratio during the budgeting process. You can calculate the direct margin using simple arithmetic if you know the selling price of the item and the direct cost of the item.
Determine the selling price of an item. For example, assume an item sells for $35.
Determine the direct cost of the item. The direct cost is the actual costs that directly go into producing an item. Examples of direct costs include raw materials and labor. For example, assume the direct cost of the same item is $25.
Subtract the direct cost of the item from the selling price of the item. Continuing the same example, $35 - $25 = $10.
Divide the figure from Step 1 by the selling price. Continuing the same example, $10 / $35 = 28.57%. This figure represents the direct margin of the item.
- "Principles of Finance"; Scott Besley and Eugene Brigham; 2008