Profit margin percentage

Definition

Profit margin percentage is a financial metric that shows the percentage of revenue that exceeds the costs of producing goods or services. It indicates how efficiently a company is managing its expenses relative to its revenue.

5 Must Know Facts For Your Next Test

1. Profit margin percentage is calculated as (Net Income / Revenue) x 100.
2. It is used to assess the profitability of responsibility centers within an organization.
3. Higher profit margins indicate better cost control and higher profitability.
4. It helps in comparing the performance of different responsibility centers or business units.
5. Profit margin percentage can vary significantly between industries, making industry benchmarks important for analysis.

Review Questions

• How do you calculate profit margin percentage?
• Why is profit margin percentage important in assessing responsibility centers?
• What does a higher profit margin percentage indicate about a company’s cost management?

Related terms

Responsibility Center: A unit within an organization for which a manager is held accountable for certain activities and financial outcomes.

Revenue Center: A type of responsibility center focused solely on generating sales or revenue.

Cost Center: A type of responsibility center where managers are responsible only for controlling costs, not generating revenue.