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Simple English definitions for legal terms
profit margin
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A quick definition of profit margin:
Profit margin refers to the amount of money a company makes after subtracting the cost of producing and selling its products or services. It is the percentage of revenue that remains as profit. For example, if a company sells a product for $100 and it costs $70 to produce and sell, the profit margin would be 30%. This means that for every $100 in revenue, the company makes $30 in profit. A higher profit margin is generally seen as a good thing, as it means the company is making more money relative to its costs.
A more thorough explanation:
Definition: Profit margin is the percentage of revenue that a company keeps as profit after deducting all the expenses. It is calculated by dividing the net profit by the revenue and multiplying the result by 100.
Example: If a company has a revenue of $100,000 and its expenses are $80,000, then its net profit is $20,000. The profit margin would be calculated as follows:
Profit Margin = (Net Profit / Revenue) x 100
Profit Margin = ($20,000 / $100,000) x 100 = 20%
This means that the company keeps 20% of its revenue as profit after paying all the expenses.
Another Example: A bakery sells cakes for $20 each. The cost of ingredients and labor to make one cake is $10. The bakery sells 100 cakes in a month, which means its revenue is $2,000. The total cost of making 100 cakes is $1,000. Therefore, the net profit is $1,000. The profit margin would be:
Profit Margin = (Net Profit / Revenue) x 100
Profit Margin = ($1,000 / $2,000) x 100 = 50%
This means that the bakery keeps 50% of its revenue as profit after deducting the cost of making the cakes.
The examples illustrate that profit margin is the percentage of revenue that a company keeps as profit after paying all the expenses. It is an important metric for businesses to measure their profitability and financial health.