Profit Margin
Product profit margin is a metric that measures the profitability of a product by indicating the percentage of revenue that is left over after all the direct costs associated with producing and selling the product have been subtracted. It is calculated by taking the difference between the product’s revenue and its cost of goods sold (COGS), and then dividing that number by the product’s revenue. The formula for product profit margin is:
Product Profit Margin = (Revenue – COGS) / Revenue
It is usually expressed as a percentage.
For example, if a product has revenue of $100 and COGS of $70, the product profit margin would be 30% (($100 – $70) / $100). A high product profit margin means that a product is generating a significant amount of profit relative to its revenue, while a low product profit margin indicates that the product is less profitable. It is important to note that the product profit margin is different from the company’s overall profit margin which include all expenses.
Companies use product profit margin to track the profitability of individual products and product lines, to make decisions about pricing, production, and inventory management, and to evaluate the overall health of the business.
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