Profit Margin Calculations Flashcards

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What does ‘profit margin’ show?

How much profit is made from each £1 of sales, shown as a percentage.

Gross profit margin (%) = (Gross profit / Sales revenue) x 100.

Net profit margin (%) = (Net profit / Sales revenue) x 100.

Gross profit = Sales revenue – Cost of sales.

Gross profit = £50,000 – £30,000 = £20,000. GPM = £20,000 / £50,000 x 100 = 40%.

NPM = £8,000 / £80,000 x 100 = 10%.

The business makes 40p gross profit for every £1 of sales.

Gross profit margin uses gross profit (after cost of sales). Net profit margin uses net profit (after all other expenses).

Gross profit margin is higher because it does not include other expenses like rent and wages.

Raise selling price or cut cost of sales, such as buying cheaper stock or reducing waste.

Gross profit = 25% x £12,000 = £3,000.

The firm now keeps more profit from each £1 of sales. Costs fell as a share of sales, or prices increased.