Calculate the total profit and margin percent of a sold good given the sell price and initial cost to help determine the best sell point for your goods.
The formula for margin is fairly simple, but many often get confused on how to calculate it. Margin is calculated with the following:
M (%) = GP / ROGS * 100
- Where M is the margin (%)
- GP is the gross profit
- ROGS is the revenue of goods sold.
For example, if you sell a good for $100.00 and the good costs $50.00 to make, your total profit is $50.00 and your margin is 50%.
How to calculate margin? The following example illustrates the process of calculating a margin on an individual product or service.
- First, determine the cost of the item being sold. For this example, we have a store selling candy bars that cost them $1.50 per bar to purchase.
- Next, determine the selling price. The store is selling those same candy bars for $2.50. This is also known as revenue.
- Next, calculate the total profit. The total profit is calculated by subtracting the cost from the revenue. $2.50 – $1.50 = $1.00.
- Finally, calculate the margin. Using the formula above, we calculate the margin as $1.00/$2.50 * 100 = 40%.
Gross Margin Definition
Margin is the term used in business that refers to the revenue generated after accounting for costs of goods. Margin is often used as a measure of profitability or productivity in business.
How can a business use margin to understand productivity? It’s a simple equation, a greater margin = greater productivity. That’s because margin accounts for the total cost of goods as well as the revenue. Higher revenue and lower cost of goods will both lead to a higher margin, therefore, it can be equated to productivity.
This financial metric is important for driving decisions in a company. If margin starts to decline, business owners can look at the simple formula to get to the root cause.
For example, if a company recently changed suppliers for a certain material and they are getting those goods for cheaper, then margin should increase. If it is not, that means that the productivity is decreasing as the total costs of producing the final product have gone up. This could be due to a lower quality material or a change in processes.
Margin vs. Markup
Markup is a similar but different financial metric that businesses use. It often gets mixed up with margin, but it’s very important to understand the difference because they calculate very different things.
Markup shows the ratio of gross profit to cost instead of gross profit to revenue. Calculated with the following formula:
Markup = Profit / Cost of Goods *100
As you can see, this doesn’t take into account profit, which is the key difference between the metrics. Let’s look at an example.
Let’s say you sell a good for 150$, and it costs $70. Using the formulas above, the Margin (%) would be 53.33% and the markup would be 114.29%. As you can see these are drastically different numbers. Getting them confused could be catastrophic for any business.