Profit Margin Calculations
The two profit margins you must know by heart: gross profit margin and net profit margin, how to calculate each from revenue and profit, and what a higher margin tells you.
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Free interactive practice at using the material, which is what the marks are for.
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Turning profit into a margin
A profit margin turns profit into a percentage of revenue, so firms of different sizes can be compared fairly. There are two. Gross profit is revenue minus the cost of sales, and the gross profit margin is that gross profit divided by revenue, times 100. Net profit is what remains once all the other expenses, such as wages and rent, are taken off too, and the net profit margin is net profit divided by revenue, times 100. The net margin is always the lower of the two. A higher margin means the business keeps more of every pound of sales as profit. One warning that matters more here than almost anywhere else: the exam gives you no formulae, so you must learn both by heart. This module teaches the two calculations.
Margin words
Learn these by heart before you calculate, because the exam will not give you the formulae.
Gross margin against net margin
The two margins use the same revenue but a different profit, so one is always higher than the other.
How to work out a margin
Take it in three sure steps, from memory since no formula is provided. First choose the right profit: use gross profit for the gross margin, or net profit for the net margin. Next divide that profit by the revenue. Finally multiply by 100 to turn it into a percentage. The same shape works for both margins, only the profit changes. Learn that shape so well that you can write it without a prompt, because in this topic the marks hinge on recalling the calculation correctly.
Match the term to its formula
- gross profit
- net profit
- gross profit margin
- net profit margin
- revenue minus the cost of sales
- gross profit minus all other expenses
- gross profit divided by revenue, times 100
- net profit divided by revenue, times 100
Work out the gross margin
A firm has revenue of 400 pounds and gross profit of 100 pounds. Using the formula, what is its gross profit margin?
- 25 per cent.
- 400 per cent.
- 75 per cent.
- 100 per cent.
Working out a margin
Select the TWO steps used to calculate a profit margin.
- Divide the profit by the revenue
- Multiply the result by 100
- Divide the revenue by the profit
- Copy the formula printed in the exam paper
Gross profit margin
A firm has revenue of 2000 pounds and gross profit of 500 pounds. Divide the gross profit by the revenue and multiply by 100 to find the gross profit margin, as a value in per cent.
Order the net margin calculation
Put the steps of calculating the net profit margin in order, earliest first.
- Start with the revenue
- Take off all costs to find the net profit
- Divide the net profit by the revenue
- Multiply by 100 for the net profit margin
Complete the facts
Revenue minus the cost of sales gives the _____ profit. After all other expenses are taken off, what remains is the _____ profit. A profit margin shows profit as a percentage of _____. Because it comes after more costs, the net margin is always _____ than the gross margin.
Match the figure to what it tells you
- a rising gross profit margin
- a rising net profit margin
- a higher margin than a rival
- a falling margin
- more is kept from each sale before expenses
- more is kept from each sale after all costs
- the firm is more profitable for each pound sold
- costs are rising or prices are falling
Spot the true margin facts
Tap the TWO statements that are true about profit margins.
- A margin divides profit by revenue and times 100
- The net margin is always lower than the gross margin
- The exam prints the margin formulae for you
- A margin divides revenue by profit
Judge the margins
Read each case and choose the best response, with a reason.
- Firm A has a net profit margin of 12 per cent and Firm B has 6 per cent, with similar products. Which keeps more profit from each sale?
- A student divides revenue by profit to find the margin. What have they done wrong?
- A student plans to wait for the exam to give the margin formula. Why is that a mistake?
Explain the profit margins
A shop owner wants to understand the two profit margins and how to work them out. Explain them clearly.
- Explain what gross profit and net profit are
- Give the formula for the gross profit margin
- Give the formula for the net profit margin
- Explain why the net margin is always lower than the gross margin
- Finish with a judgement on what a higher margin tells the owner and why the formulae must be memorised