Legal Definitions - profit margin

Profit margin is a financial metric that indicates the profitability of a product, service, or business. It measures how much profit a company makes for every dollar of revenue generated from sales, after accounting for the costs associated with producing or acquiring what was sold. It is typically expressed as a percentage.

To calculate profit margin, you first determine the total profit by subtracting the costs from the selling price or revenue. Then, you divide this profit by the selling price or revenue and multiply by 100 to get a percentage.

• Example 1: Retail Business

  A small bookstore purchases a popular novel from its distributor for $12.00 and sells it to customers for $20.00. To calculate the profit margin for this book, the bookstore first finds the profit: $20.00 (selling price) - $12.00 (cost) = $8.00. Then, it divides the profit by the selling price: $8.00 / $20.00 = 0.40. Multiplied by 100, this gives a profit margin of 40%. This means that for every dollar of revenue from selling that novel, the bookstore retains 40 cents as profit after covering the direct cost of the book.

• Example 2: Service Provider

  A freelance web developer charges a client $3,000 for designing a new website. The developer's direct costs for this project include a premium software license ($50), stock images ($20), and a specific hosting service for the client ($30). The total direct costs are $100. The profit from this project is $3,000 (revenue) - $100 (costs) = $2,900. The profit margin is calculated as $2,900 / $3,000 = 0.9667, or approximately 96.7%. This high profit margin indicates that the developer's services have relatively low direct costs compared to the revenue they generate.

• Example 3: Manufacturing

  A local artisan bakery produces a batch of specialty cookies. The total cost of ingredients, labor, and packaging for one dozen cookies is $8.00. The bakery sells this dozen for $15.00. The profit per dozen is $15.00 (selling price) - $8.00 (costs) = $7.00. To find the profit margin, they divide the profit by the selling price: $7.00 / $15.00 = 0.4667. Expressed as a percentage, this is approximately 46.7%. This figure helps the bakery understand how much of each sale contributes to their overall profitability after covering the direct expenses of making the cookies.