What are net profit, net profit margin,gross profit margin, and operating profit margin? Why are these...

What are net profit, net profit margin,gross profit margin, and operating profit margin? Why are these indicators important in business? Explain the importance of knowing how much profit is generated for each dollar in sales? Give specific examples how knowing these information will be helpful in your business.

Expert Solution

Gross Profit refers to the amount earned by the company by subtracting the cost of goods sold (COGS) from revenue (sales) of the firm. All expenses related to manufacturing are subtracted from the revenue earned.

Gross Profit margin is a measure of company's financial health, It is the percentage of revenue that excess cost of goods sold. The formula for gross profit margin is [Gross Profit/ Sales (Revenue)] X 100. Higher the ratio, higher is the profitability from the product.

Net profit is the profit earned after subtracting all indirect expenses( tax, packaging, depreciation) from the gross profit.

Net profit margin is the ratio of net profit to the sales or percentage of net profit earned to the revenue generated. Formula is (Net profit/ Revenue) X 100

The operating profit margin is the profit earned per dollar of sales, which is calculated after subtracting all the variable costs incurred by he company like wages , raw material , salaries, etc excluding interest or tax.
The formula is (operating profit/revenue). Operating earnings are also called Earnings before interest and tax.

All the above ratios indicate the profitability of the product and are necessary for knowing the efficiency in the organisation. Higher the ratios , lesser is the cost and better is the efficiency and vice versa.
It is important to know how much profit is earned by each dollar in order to control the cost and whether to know that this product is beneficial for the company or not.

For example a company sells two products A and B having same amount of sales revenue. If A product has 0.15$
and B has 0.35$ operating profit margin. Then the company would definitely focus on increasing product B's sales as it given 0.20$ of extra profit from product A.

keosha answered 4 weeks ago

If Gross Profit Margin is 55%, what is COGS %?

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