How to calculate Profit Margin %

DanielRose
DanielRose Registered Posts: 2 New contributor 🐸
in Management Accounting Techniques
Hi guys, I would really appreciate some help here: I don't understand the method for adding profit margin % onto the total price of a quotation.
Could someone please explain why it is done like that?
I would have assumed that I would be able to calculate it in the same way that I would calculate VAT inclusive from VAT exclusive. But that doesn't give me the correct figure.
Many thanks!

Comments

  • anony123
    anony123 Registered Posts: 515 Epic contributor 🐘
    If I remember correctly, you need to get the total amount for the quotation (total revenue) and then minus any expenses. Then the total you divide by the original amount (total revenue) and then times it by 100. So for example say it the quote was for 100. We would do 100 - any expenses like COS, rent, electricity etc. Then we would divide that amount by the total revenue which would be 100 and then times the amount calculated by 100.

    E.G: 100-30 comes to 70/100*100 = 70% Profit Margin.
  • shamilkaria
    shamilkaria Registered Posts: 123 Dedicated contributor 🦉
    Hi @DanielRose

    I hope you are well?

    Not too sure if this is correct or if it is what you meant.

    So let's say your costs are £100 but you want a 20% profit Margin. So we would do 1 - 0.2 = 0.8. Then you would do £100 / (Divide By) 0.8 = £125. So if you took 20% off £125 it would be £100.

    In simple the 1 just represents 100% as a decimal and then minus by your required profit margin (again as a decimal) then divide by the difference.

    Another example - 25% Profit Margin of £50. So it would be 1- 25 = 0.75. So we would £50 / (Divide by) 0.75 = £66.67. If you take off 25% from £66.67 you will get back to £50.

    Hopefully this is what you meant?

    Kind regards

    Shamil

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