profit margin buffs

[Vasquez]

ok today at work I asked how we calculate profit margins and what the retail price is I was told we take the cost price and divide by 48% cue me going

so I did the calcs and sure enough out came our retail price simple enough but what I don't understand why you divde the the cost price by a percentage of itself why not just find out say 200% of the cost and use that as a retail price?

am I missing something or is this an accountancy trick of some kind?

 

[monkeyspank]

Because profit margins are a percentage of the total price, not the cost price.

 

[[DOD]Asprilla]

If your profit margin is fixed (i.e. 48%) then it's the easiest way of calculating the retail price based on the cost price.

My bother introducing another step into the equations?

 

[Pug]

If your profit margin is fixed (i.e. 48%) then it's the easiest way of calculating the retail price based on the cost price.

My bother introducing another step into the equations?

exactly - tho its an interesting business that makes 48% on EVERYthing

 

[Vasquez]

It makes sense now just had a bit of a brain fart.

cheers chaps

exactly - tho its an interesting business that makes 48% on EVERYthing

we don't it was a special order that we did and the margin is 48%.

 

[[DOD]Asprilla]

exactly - tho its an interesting business that makes 48% on EVERYthing

A restaurant kitchen will easily make 200% margin on it's cost prices, but that doesn't take all fixed costs into account.

 

[monkeyspank]

The reason you divide it by a percentage is because you are essentially working backwards. Adding 48% to the cost price will give less total, because a fixed percentage of the total price is obviously more than that same percentage of the cost price. the 48% relates to the larger number, not the smaller number

 

[Malc]

Dividing by 0.48 is the same as multiplying by 2.08 so the actual profit the company is making is 208% percent. The profit of the total price is 52%. So dividing by 0.48 is just dividing by 1 minus the profit margin. (I think anyway!)

 

[Skidder]

I think you are talking about cost of goods sold rather than profit margin. i.e the sale pricec relative to the cost of the goods but not operating expenses such as rent, staffing, utilities, insurance etc. etc. Would that be correct? If not i want in to whatever business you are in.

Cost of sales on most merchandise is 40 to 50 % and on food and drink about 25 to 35 percent

 

[Vasquez]

Its the percentage we add to the cost of goods to us, so yes its not the total profit with total expenses.

I'll need to read up somemore on wikipedia i think

 

[Guv]

Example

Cost = £100
cost = 48% of retail price, therefore profit margin = 52% (100% - 48%)


So to get the retail price from the cost you take £100 and would divide it by 48 and multiply by 100. To simplify the 'divide by 48, multiply by 100' part you could divide by 0.48 (48 divided by 100). 0.48 = 48%.

It's the same as saying we want our profit margin to be 52%. If the cost is £100 and represents 48% to get 52% you take £100 divided by 48 multiply by 52 = £108.33 (profit margin). The retail price is therefore £108.33 + £100 = £208.33 (the same as £100/48%).

There are many ways of getting to the same answer, some simpler than others and the one you've been told about is probably the simplest.

You're looking at gross profit margin. Net profit margin would vary depending on overhead costs.

 

[mangobreeder]

A restaurant kitchen will easily make 200% margin on it's cost prices, but that doesn't take all fixed costs into account.

Quoted for truth.

I buy, every now and again Fillet steak from Harrods, its not abderdeen angus, is a rarer breed which i cant remember, and its around £8 a steak and its 100 times better than any steak you would buy in a resturant, and its cheaper