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Sales and cost are two important factors that determine the profitability of a business. The difference between the cost of goods and the total sales is the basis for calculating the total net income margin.
The first thing to calculate when determining margin is total revenue, which you can find in your income statement. It’s the amount of money you made from the sale of whatever it is that your business does.
How to calculate cost margin
Cost margin is calculated as the difference between the revenue of goods sold and the total direct costs associated with the production of the goods, divided by total revenue.
To calculate cost margin, you must determine the costs of production. This includes salaries of employees, raw materials, rent for facilities and equipment, as well as any other expenses which directly affect the production process. When calculating the total costs of production, it is important to remember that fixed costs are those that remain the same no matter how much money is brought in. These are usually accounted for in the overall production budget.
The income statement has many different levels of costs and a cost margin that accompanies each one. Cost margin percentage decreases the closer you get to net income.
Gross profit
Gross profit is basically the difference between your sales revenue and your cost of goods sold (COGS). In other words, it’s what’s leftover after you sell a product (or service) and pay for the things you need to make that sale.
Let’s say the sales amount for the most recent fiscal year is $200,000. Then, subtract the cost to produce the product or cost of goods sold (CGS) from total sales. The answer you get is known as gross profit.
Gross profit cost margin
To calculate gross profit cost margin, divide gross profit by the sale of goods. For example, if the cost of goods sold is $40,000, then the gross profit margin will be $160,000, which is the amount of sales for the year ($200,000) minus the cost of goods sold ($40,000) divided by $200,000 or 80 percent.
Operating cost margin
To calculate operating cost margin, subtract gross profit from operating costs and divide by sales. If operating costs are $60,000 the operating cost margin will be $100,000 divided by $200,000, or 50 percent.
Net income cost margin
To calculate net income cost margin, subtract operating profit from the total costs associated with profit-making. This includes tax provisions and interest expenses. If the tax provision and interest expense equal $20,000 then the net income will be $80,000. Net income cost margin is net income ($80,000) divided by sales ($200,000), which gives you 40 percent.