Gross & Net Profit Margin – Short Answer

Practice Question

Intro to Financial Accounting
Reporting and Interpreting Financial Information
Ratio Analysis
Short Answer

A company has a gross profit of $150,000 and total sales of $600,000. Calculate the gross profit margin. If the company’s operating expenses total $70,000, calculate the net profit margin.

Answer +

Gross Profit Margin: 25%

Net Profit Margin: 13.33%

Explanation +

Step 1: Calculate Gross Profit Margin
Gross Profit Margin = Gross Profit ÷ Total Sales = 150,000 ÷ 600,000 = 0.25 or 25%

Step 2: Calculate Net Profit
Net Profit = Gross Profit − Operating Expenses = 150,000 − 70,000 = 80,000

Step 3: Calculate Net Profit Margin
Net Profit Margin = Net Profit ÷ Total Sales = 80,000 ÷ 600,000 = 0.1333 or 13.33%