Editing Profit margin (section)

== Type of profit margin ==
There are three types of profit margins: [[gross profit margin]], [[operating profit margin]] and net profit margin.

=== Gross profit margin ===
Gross profit margin is calculated as gross profit divided by net sales (percentage). Gross profit is calculated by deducting the cost of goods sold (COGS)—that is, all the direct costs—from the revenue. This margin compares revenue to [[variable cost]].
Service companies, such as law firms, can use the cost of revenue (the total cost to achieve a sale) instead of the cost of goods sold (COGS). It is calculated as:<!-- --><math display="block">\text{Gross Profit} = \text{Revenue} - (\text{Direct materials} + \text{Direct labor} + \text{Factory overhead})</math>
<!-- --><math display="block">\text{Net Sales} = \text{Revenue} - \text{Cost of Sales Returns} - \text{Allowances and Discounts}</math>
<!-- --><math display="block">\text{Gross Profit Margin} = {100 \cdot \text{Gross Profit}\over\text{Net Sales}}</math>

'''Example.''' If a company takes in a revenue of $1,000,000 and $600,000 in COGS. Gross profit is $400,000, and gross profit margin is (400,000 /.                        1,000,000) x 100 = 40%.

=== Operating profit margin ===
[[Operating margin|Operating profit margin]] includes the cost of goods sold and is the earning before interest and taxes ([[Earnings before interest and taxes|EBIT]]) known as operating income divided by revenue. The COGS formula is the same across most industries, but what is included in each of the elements can vary for each. It should be calculated as:<!-- --> <math display="block">\text{Operating Profit Margin} = {100 \cdot \text{Operating Income}\over\text{Revenue}}</math>

'''Example.''' If a company has $1,000,000 in revenue, $600,000 in COGS, and $200,000 in operating expenses. Operating profit is $200,000, and       operating profit margin is (200,000 / 1,000,000) x 100 = 20%.

=== Net profit margin ===
Net profit margin is net profit divided by revenue. Net profit is calculated as revenue minus all expenses from total sales.<!-- --> <math display="block">\text{Net Profit Margin} = {100 \cdot \text{Net profit}\over\text{Revenue}}</math>

'''Example.''' A company has $1,000,000 in revenue, $600,000 in COGS, $200,000 in operating expenses, and $50,000 in taxes. Net profit is $150,000, and net profit margin is (150,000 / 1,000,000) x 100 = 15%.