How to Calculate Cost Margin

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Profitability is based on two things: sales and costs. The difference between the two provides the basis for calculating total net income margin. Margin, in the world of finance and accounting, refers to the percentage of sales. In other words, net income margin is the percentage of sales which accounts for net income. There are several different levels of costs on the income statement and a cost margin to go along with each one. The closer you get to net income the lower the cost margin percentage.

  • Obtain the amount of sales for the latest fiscal year. Let's say this amount is $100,000.

  • Subtract the cost of goods sold (CGS) from sales. The answer is referred to as gross profit.

  • Calculate the gross profit cost margin. The gross profit cost margin is calculated by dividing gross profit by sales. For instance, if the cost of goods sold is $20,000 then the gross profit margin is $80,000 ($100,000 minus $20,000) divided by $100,000 or 80 percent.

  • Calculate the operating cost margin. Subtract operating costs from gross profit and then divide by sales. If operating costs are $30,000 then the operating cost margin is $50,000 divided by $100,000, or 50 percent.

  • Calculate the net income cost margin. Subtract all other costs associated with making a profit from the operating profit. This includes interest expense and tax provisions. If the interest expense and tax provision equal $10,000 then the net income is $40,000. The net income cost margin is net income divided by sales or $40,000 divided by $100,000, which equals 40 percent.

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