22.8 Net Profit Margin
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The document discusses the concept of net profit margin and how it is calculated. It provides an example calculation where a company had $350,000 in sales, $192,500 in cost of goods sold, $105,000 in other expenses, and $52,500 in net profit. This results in a net profit margin of 15% ($52,500/$350,000). The document then discusses how a company can improve its net profit margin by either increasing gross profit or decreasing other expenses.
22.8 Net Profit Margin
- 2. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Net Profit Margin: 22.8 NET PROFIT MARGIN Net Profit Margin Net Profit Sales = 52,500 350,000 = = 15.0% Income Statement $ Revenue 350,000 less Cost of Goods Sold 192,500 Gross Profit 157,500 less Other Expenses 105,000 Net Profit 52,500 Income Statement $ Revenue 350,000 less Cost of Goods Sold 192,500 Gross Profit 157,500 less Other Expenses 105,000 Net Profit 52,500 Income Statement $ Revenue 350,000 less Cost of Goods Sold 192,500 Gross Profit 157,500 less Other Expenses 105,000 Net Profit 52,500
- 3. © Michael Allison, Trinity Grammar School. Author’s permission required for external use 22.8 NET PROFIT MARGIN $1 of Sales $0.45 of Gross Profit $0.55 of COGS Income Statement $0.30 of Other Exp $0.15 of Net Profit What does this mean? For every $1 the firm generates in sales an overall Net Profit of 15 cents is earned. Net Profit Margin Net Profit Sales = 52,500 350,000 = = 15.0%
- 4. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Net Profit Margin: How much profit is earned after all Expenses have been deducted from Revenue $0.55 $0.30 $0.15 $- $1 $1 of Sales Cost of Goods Sold Other Expenses Net Profit 22.8 NET PROFIT MARGIN
- 5. © Michael Allison, Trinity Grammar School. Author’s permission required for external use 22.8 NET PROFIT MARGIN
- 6. © Michael Allison, Trinity Grammar School. Author’s permission required for external use Net Profit Margin: interpreting the trend,,, Net Profit Margin = 15% < For every $1 of sales, the firm earns 15 cents Net Profit < Net Profit Margin = 6% For every $1 of sales, the firm earns 6 cents Net Profit Net Profit Margin = 22% For every $1 of sales, the firm earns 22 cents Net Profit 22.8 NET PROFIT MARGIN $1 Sales $0.60 Gross Profit $0.40 COGS $0.45 Exp $0.15 Net Profit $1 Sales $0.60 Gross Profit $0.40 COGS $0.54 Exp $0.06 Net Profit The firm is earning less Net Profit on each sale $1 Sales $0.60 Gross Profit $0.40 COGS $0.38 Exp $0.22 Net Profit The firm is earning more Net Profit on each sale
- 7. © Michael Allison, Trinity Grammar School. Author’s permission required for external use 22.8 NET PROFIT MARGIN 62.5% 52.8% 20.3% 37.8% 17.2% 9.4% Business B Business A Breakdown of every $1 of Sales Cost of Goods Sold Other Expenses Net Profit Margin
- 8. © Michael Allison, Trinity Grammar School. Author’s permission required for external use 22.8 NET PROFIT MARGIN Net Profit Margin: how to improve it,,, Last year… Income Statement $ Revenue 100,000 less Cost of Goods Sold 60,000 Gross Profit 40,000 less Other Expenses 25,000 Net Profit 15,000 Net Profit Sales Net Profit Margin = 15,000 100,000 = 15.0%= Income Statement $ Revenue 110,000 less Cost of Goods Sold 60,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Net Profit Sales Net Profit Margin = 25,000 110,000 = 22.7%= Option 1: Gross Profit Income Statement $ Revenue 110,000 less Cost of Goods Sold 60,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 60,000 Gross Profit 40,000 less Other Expenses 25,000 Net Profit 15,000 Income Statement $ Revenue 110,000 less Cost of Goods Sold 60,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 110,000 less Cost of Goods Sold 60,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 110,000 less Cost of Goods Sold 60,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 110,000 less Cost of Goods Sold 60,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 50,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 60,000 Gross Profit 40,000 less Other Expenses 25,000 Net Profit 15,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 50,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 60,000 Gross Profit 40,000 less Other Expenses 25,000 Net Profit 15,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 50,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 50,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 50,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 50,000 Gross Profit 50,000 less Other Expenses 25,000 Net Profit 25,000 Net Profit Sales Net Profit Margin = 25,000 100,000 = 25.0%=
- 9. © Michael Allison, Trinity Grammar School. Author’s permission required for external use 22.8 NET PROFIT MARGIN Net Profit Margin: how to improve it,,, Last year… Income Statement $ Revenue 100,000 less Cost of Goods Sold 60,000 Gross Profit 40,000 less Other Expenses 25,000 Net Profit 15,000 Net Profit Sales Net Profit Margin = 15,000 100,000 = 15.0%= Income Statement $ Revenue 100,000 less Cost of Goods Sold 60,000 Gross Profit 40,000 less Other Expenses 15,000 Net Profit 25,000 Net Profit Sales Net Profit Margin = 25,000 100,000 = 25.0%= Option 2: Other Expenses Income Statement $ Revenue 100,000 less Cost of Goods Sold 60,000 Gross Profit 40,000 less Other Expenses 25,000 Net Profit 15,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 60,000 Gross Profit 40,000 less Other Expenses 15,000 Net Profit 25,000 Income Statement $ Revenue 100,000 less Cost of Goods Sold 60,000 Gross Profit 40,000 less Other Expenses 15,000 Net Profit 25,000
- 10. © Michael Allison, Trinity Grammar School. Author’s permission required for external use TASK In-class Homework SQ12 X SQ13 X Ex22.2 not (c) X Ex22.3 not (b) X