profit margins

(noun)

Profit margin, net margin, net profit margin or net profit ratio all refer to a measure of profitability. It is calculated by finding the net profit as a percentage of the revenue.

Examples of profit margins in the following topics:

  • Profit Margin

    • Profit margin is one of the most used profitability ratios.
    • Profit margin refers to the amount of profit that a company earns through sales.
    • The higher the profit margin, the more profit a company earns on each sale.
    • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
    • A low profit margin indicates a low margin of safety.

  • Profitability Ratios

    • Thus, the Profit Margin = 10000 / 50000 = 20 percent.
    • Profit Margin: The profit margin is one of the most used profitability ratios.
    • The profit margin refers to the amount of profit that a company earns through sales.
    • The higher the profit margin, the more profit a company earns on each sale.
    • A low profit margin indicates a low margin of safety and a higher risk that a decline in sales will erase profits and result in a net loss or a negative margin.

  • Marginal Analysis

    • In the marginal analysis of pricing decisions, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced.
    • Alternatively, if marginal revenue is less than the marginal cost, marginal profit is negative and a lesser quantity should be produced.
    • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
    • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero.
    • In this case, marginal profit plunges to zero immediately after that maximum is reached.

  • Profit

    • An alternative perspective relies on the relationship that, for each unit sold, marginal profit (Mπ) equals marginal revenue (MR) minus marginal cost (MC).
    • Then, if marginal revenue is greater than marginal cost at some level of output, marginal profit is positive and thus a greater quantity should be produced, and if marginal revenue is less than marginal cost, marginal profit is negative and a lesser quantity should be produced.
    • At the output level at which marginal revenue equals marginal cost, marginal profit is zero and this quantity is the one that maximizes profit.
    • Since total profit increases when marginal profit is positive and total profit decreases when marginal profit is negative, it must reach a maximum where marginal profit is zero - or where marginal cost equals marginal revenue - and where lower or higher output levels give lower profit levels.
    • Recall formulas for calculating profit maximizing output quantity and marginal profit

  • The Supply Curve in Perfect Competition

    • The total revenue-total cost perspective and the marginal revenue-marginal cost perspective are used to find profit maximizing quantities.
    • There are two ways in which cost curves can be used to find profit maximizing quantities: the total revenue-total cost perspective and the marginal revenue-marginal cost perspective.
    • The marginal revenue-marginal cost perspective relies on the understanding that for each unit sold, the marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).
    • If the marginal revenue is greater than the marginal cost, then the marginal profit is positive and a greater quantity of the good should be produced.
    • Likewise, if the marginal revenue is less than the marginal cost, the marginal profit is negative and a lesser quantity of the good should be produced .

  • Marginal Cost Profit Maximization Strategy

    • In order to maximize profit, the firm should set marginal revenue (MR) equal to the marginal cost (MC).
    • Profit maximization is the short run or long run process by which a firm determines the price and output level that will result in the largest profit.
    • Firms will produce up until the point that marginal cost equals marginal revenue.
    • This strategy is based on the fact that the total profit reaches its maximum point where marginal revenue equals marginal profit .
    • This is the case because the firm will continue to produce until marginal profit is equal to zero, and marginal profit equals the marginal revenue (MR) minus the marginal cost (MC).

  • Operating Margin

    • The operating margin is a ratio that determines how much money a company is actually making in profit and equals operating income divided by revenue.
    • The operating margin (also called the operating profit margin or return on sales) is a ratio that shines a light on how much money a company is actually making in profit.
    • For example, an operating margin of 0.5 means that for every dollar the company takes in revenue, it earns $0.50 in profit.
    • A company that is not making any money will have an operating margin of 0: it is selling its products or services, but isn't earning any profit from those sales.
    • The operating margin is a useful tool for determining how profitable the operations of a company are, but not necessarily how profitable the company is as a whole.

  • Transfer Pricing

    • Each of these locations are a division of the company that has to meet their own profit margins.
    • The firm must set the optimal transfer prices to maximize company profits, or each division will try to maximize their own profits leading to lower overall profits for the firm.
    • Double marginalization is when both divisions mark up prices in excess of marginal cost and overall firm profits are not optimal.
    • From marginal price determination theory, the optimum level of output is that where marginal cost equals marginal revenue.
    • From marginal price determination theory, the optimum level of output is where marginal cost equals marginal revenue.

  • Marginal Revenue and Marginal Cost Relationship for Monopoly Production

    • In traditional economics, the goal of a firm is to maximize their profits.
    • To find the profit maximizing point, firms look at marginal revenue (MR) - the total additional revenue from selling one additional unit of output - and the marginal cost (MC) - the total additional cost of producing one additional unit of output.
    • When the marginal revenue of selling a good is greater than the marginal cost of producing it, firms are making a profit on that product.
    • Production occurs where marginal cost and marginal revenue intersect.
    • Production occurs where marginal cost and marginal revenue intersect.

  • Monopoly Production Decision

    • To maximize output, monopolies produce the quantity at which marginal supply is equal to marginal cost.
    • A pure monopoly has the same economic goal of perfectly competitive companies - to maximize profit.
    • If we assume increasing marginal costs and exogenous input prices, the optimal decision for all firms is to equate the marginal cost and marginal revenue of production.
    • In short, three steps can determine a monopoly firm's profit-maximizing price and output:
    • Calculate and graph the firm's marginal revenue, marginal cost, and demand curves