Figuring out profit margins allows businesses to cross-calculate profit for varying goods and services. Using a simple formula, profit margin can be calculated to determine how much of a return a business has received on an item after taxes and the cost of production.
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Use profit margin to calculate return on goods and services that have been manufactured and produced for sale. Profit margin allows a business to determine profit, without needing to make allowances for varying manufacturing costs. It provides a value for the comparison of various products and services based on revenue and production costs.
Follow the paper trail. When calculating profit margin, determine the cost to manufacture the product. Next, determine the tax paid on that item. Write down all the numbers and highlight the market price for the product. That number is the price tag the consumer pays to consume the product or service.
Do the math. Company A manufactures a widget A for £13. The cost to manufacture the widget is £7, with an additional £2 dollar tax added to that total. Calculate the net income for Company A with revenue for widget A listed at £13. Based on a revenue of £13, the profit margin is £2 dollars, or 20 per cent. The formula is written as Revenue - Manufacturing Cost - Tax. Numerically, the expression is written: £13 - £7 - £2 = £2. The profit margin is 20 per cent (4 / 20).
Tips and warnings
- Compare your profit margins with those of similar companies within your industry. This helps you to evaluate the financial health of your company.
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