Definition of Profit Margin
Profit margin from parts of profitability ratios, which reflects the reality of the company and the extent of its effectiveness and commercial activity in the market, and the profit margin is the difference between sales revenue (sale price) and the company’s production costs during a specific time period, and production costs include fixed and variable costs, in addition to that percentages It turned into profits, according to the specialists. If the profit margins in the company decrease, this indicates weakness in managing the expenses in the correct, regular, and proper ways.
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How is the Profit Margin Calculated?
Profit = net income ÷ net sales
Net Income = Total Revenue – Total fixed and variable costs
Net sales = total sales – sales returns – sales allowances – discounts
Example:
Project what is spent on manufacturing supplies 20 thousand dollars; 80 thousand dollars labor force, 400 thousand dollars net sales revenue.
Total costs = $100,000
Income = total revenue – total fixed and variable costs (200000 – 100,000) = 100,000
Profit margin = net income ÷ net sales
Profit margin = (100,000 ÷ 400000) = 0.25 = (25%)
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Appropriate Ways to Increase Profit Margins
- Avoiding discounts on products, goods, and services, as a way to attract customers and customers
- Quality and production costs and lack of price competition.
- Use all available resources in all their forms, with minimal times and minimal effort.
- Get the best price from our suppliers.
- Using inventory that helps reduce theft and stock obsolescence.
- Study the market well and know what customers and clients require in the market.
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