Profit Margin Calculations
Two shops can both make a profit, yet one is doing far better. Margins show how much profit a business keeps from its sales. Learn to calculate them, and to read them wisely.
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More than just profit
How can you tell if a business is doing well? Profit on its own does not tell the whole story. Margins show how much profit a business keeps from every pound of sales. This module is about gross and net profit, profit margins, the average rate of return, and the limits of the numbers.
Profit margin words
Four ideas run through this topic:
Gross and net
There are two kinds of profit, and they are worked out in steps.
What is gross profit?
How is gross profit worked out?
- Revenue minus the cost of sales
- Revenue plus all of the costs
- The total money coming in
- The tax a business pays
Work out the margin
A cafe has revenue of 4000 pounds and a gross profit of 1600 pounds. Gross profit margin = gross profit / revenue x 100. What is the gross profit margin, as a percentage? Enter the number only.
What the numbers miss
Financial figures are useful, but they have limits. They are historic, so they show the past, not the future. They also ignore non-financial factors such as reputation, staff morale and customer loyalty. So use the numbers to inform a decision, not to make it on their own.
Reading the data
Which THREE are limitations of relying only on financial data?
- It is historic and shows only the past
- It ignores non-financial factors like reputation
- It may not predict the future
- It is always completely accurate
- It removes all business risk
Match the formula
- Gross profit
- Net profit
- Gross profit margin
- Average rate of return
- Revenue minus the cost of sales
- Gross profit minus other expenses
- Gross profit divided by revenue, times 100
- Average annual profit divided by cost, times 100
Rate of return
A machine costs 20000 pounds and gives an average annual profit of 4000 pounds. Average rate of return = average annual profit / cost x 100. What is the average rate of return, as a percentage? Enter the number only.
In the right order
Put the steps to find the net profit margin in order.
- Start with the revenue
- Subtract the cost of sales to get gross profit
- Subtract other expenses to get net profit
- Divide the net profit by the revenue
- Multiply by 100 to get the net profit margin
Complete the idea
Gross profit is revenue minus the _____ of sales. Net profit is gross profit minus other _____. The gross profit _____ shows gross profit as a percentage of _____. A higher margin usually means the business keeps more _____ from each sale.
True or not?
Tap the TWO statements that are TRUE.
- A higher net profit margin means more profit is kept from each pound of sales.
- Financial data is historic, so it may not predict the future.
- A profit margin is measured in pounds, not as a percentage.
- Financial data captures staff morale and reputation.
- Gross profit is always larger than revenue.
Read the numbers
Two shops have the same revenue. Help the owner use the figures wisely.
- Shop A has a net profit margin of 40 percent, Shop B has 20 percent. Which keeps more profit per sale?
- The owner wants to judge next year from these figures. What should they remember?
- What else should the owner consider beyond the numbers?
Evaluate it
A business has a gross profit margin of 40 percent and a net profit margin of 25 percent. Evaluate how well it is performing.
- Explain what the two margins tell you
- Compare the gross and net margin and what the gap suggests
- Discuss the limitations of using only financial data
- Give a supported judgement on the performance