Profit Margin Formula

C

Profit margin, also called return on net sales, is calculated by dividing net income by net sales. This ratio measures the average portion of each dollar of revenue that ends up as profit.

The formula for calculating profit margin is:

C. Net income divided by net sales.

Profit margin is a financial ratio that measures the profitability of a company and indicates the amount of profit generated for each unit of sales. It represents the percentage of revenue that is converted into profit.

Here's a detailed explanation of the formula and its components:

1. Net income: Net income, also known as net profit or net earnings, is the amount of money left after deducting all expenses, including operating expenses, taxes, interest, and other costs, from the total revenue. It represents the bottom line or the profit generated by the company.

2. Net sales: Net sales refer to the total revenue generated by the company after adjusting for returns, allowances, and discounts. It represents the sales revenue earned by the company from its core operations.

To calculate profit margin, you divide the net income by the net sales. This ratio expresses the profitability of the company as a percentage. It shows how much profit is earned for each dollar of sales revenue generated.

For example, if a company has a net income of $100,000 and net sales of $500,000, the profit margin would be:

Profit Margin = Net Income / Net Sales Profit Margin = $100,000 / $500,000 Profit Margin = 0.2 or 20%

This means that for every dollar of net sales, the company generates a profit of 20 cents.

In summary, the correct formula for calculating profit margin is to divide the net income by the net sales. This ratio provides insight into a company's ability to generate profit from its sales and is widely used to assess its profitability.