How to Calculate Average Profit Margin

Businesses aim to track each move with regards to revenues and expenses, which in turn helps them calculate profits. One of the measures to calculate profitability is through profit margin.

Also referred to as net profit margin, the ratio allows businesses to assess net profit as a percentage of the revenue. It is a good indicator for price related strategies, and how a company can control its cost. However, it may not be used for comparison purposes due to the difference in expenditures of companies, even though they may be operating in the same industry.

Instructions

  • 1

    Determining costs and revenues

    The first aspect is to determine the spending nature of a company. This will include items such as wages, salaries etc i.e. the actual expenses incurred in the sale of a particular product or service.

    The next element to consider is the selling price of that product. This in turn will be the revenue generated by the company.

  • 2

    Determine Profit

    Now estimate the profit made by the company. This value is calculated by subtracting cost from your revenue, with the exceeding amount termed as your net income. Lets suppose that your company sells cells a particular product for $100 and incurs cost in the region of $70. In this case your profit is equal to $30.

  • 3

    Profit Margin

    Profit Margin will be calculated by dividing the revenue from the profit. By taking the above scenario your profit margin will be equal to 30 percent (30/100)

  • 4

    Average Profit Margin

    In order to compute the average value, you will need to add all profit margins and divide by the desired number. For instance, if a company wants to calculate the average profit margin of three products and the profit margins of each are 30, 35, and 40, simply add the three and divide it by 3.  The average profit margin therefore, in this case will be equal to 35.

    While this is for a particular item, the company can also obtain the value on an annual basis by calculating its overall cost and expenses. For instance, if a business has incurred costs in the region of $10,000 and $5000 in the first and second year respectively, and earned profits as 5000 (first) and 2000 (second), it can calculate average profit margin for the two years as follow:

    7000/ 15000 x 100 = 47 percent

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