The document discusses the concept of net profit margin and how it is calculated. It provides an example calculation where a company had $350,000 in sales, $192,500 in cost of goods sold, $105,000 in other expenses, and $52,500 in net profit. This results in a net profit margin of 15% ($52,500/$350,000). The document then discusses how a company can improve its net profit margin by either increasing gross profit or decreasing other expenses.

1. 22.8
NET PROFIT MARGIN

2. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Net Profit Margin:
22.8 NET PROFIT MARGIN
Net Profit
Margin
Net Profit
Sales
=
52,500
350,000
= = 15.0%
Income Statement $
Revenue 350,000
less Cost of Goods Sold 192,500
Gross Profit 157,500
less Other Expenses 105,000
Net Profit 52,500
Income Statement $
Revenue 350,000
less Cost of Goods Sold 192,500
Gross Profit 157,500
less Other Expenses 105,000
Net Profit 52,500
Income Statement $
Revenue 350,000
less Cost of Goods Sold 192,500
Gross Profit 157,500
less Other Expenses 105,000
Net Profit 52,500

3. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.8 NET PROFIT MARGIN
$1 of
Sales
$0.45 of
Gross Profit
$0.55 of
COGS
Income Statement
$0.30 of
Other Exp
$0.15 of Net
Profit
What does this mean?
For every $1 the firm
generates in sales an
overall Net Profit of 15
cents is earned.
Net Profit
Margin
Net Profit
Sales
=
52,500
350,000
= = 15.0%

4. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Net Profit Margin:
 How much profit is earned after all Expenses have been deducted
from Revenue
$0.55 $0.30 $0.15
$- $1
$1 of Sales
Cost of Goods Sold Other Expenses Net Profit
22.8 NET PROFIT MARGIN

5. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.8 NET PROFIT MARGIN

6. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
 Net Profit Margin: interpreting the trend,,,
Net Profit
Margin
= 15%
< For every $1 of sales, the firm
earns 15 cents Net Profit <
Net Profit
Margin
= 6%
For every $1 of sales, the firm
earns 6 cents Net Profit
Net Profit
Margin
= 22%
For every $1 of sales, the firm
earns 22 cents Net Profit
22.8 NET PROFIT MARGIN
$1
Sales
$0.60
Gross
Profit
$0.40
COGS
$0.45
Exp
$0.15
Net
Profit
$1
Sales
$0.60
Gross
Profit
$0.40
COGS
$0.54
Exp
$0.06
Net
Profit
The firm is earning less Net
Profit on each sale
$1
Sales
$0.60
Gross
Profit
$0.40
COGS
$0.38
Exp
$0.22
Net
Profit
The firm is earning more Net
Profit on each sale

7. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.8 NET PROFIT MARGIN
62.5%
52.8%
20.3%
37.8%
17.2%
9.4%
Business B
Business A
Breakdown of every $1 of Sales
Cost of Goods Sold Other Expenses Net Profit Margin

8. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.8 NET PROFIT MARGIN
 Net Profit Margin: how to improve it,,,
Last year…
Income Statement $
Revenue 100,000
less Cost of Goods Sold 60,000
Gross Profit 40,000
less Other Expenses 25,000
Net Profit 15,000
Net Profit
Sales
Net Profit
Margin =
15,000
100,000
=
15.0%=
Income Statement $
Revenue 110,000
less Cost of Goods Sold 60,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Net Profit
Sales
Net Profit
Margin =
25,000
110,000
=
22.7%=
Option 1:  Gross Profit
Income Statement $
Revenue 110,000
less Cost of Goods Sold 60,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 60,000
Gross Profit 40,000
less Other Expenses 25,000
Net Profit 15,000
Income Statement $
Revenue 110,000
less Cost of Goods Sold 60,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 110,000
less Cost of Goods Sold 60,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 110,000
less Cost of Goods Sold 60,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 110,000
less Cost of Goods Sold 60,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 50,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 60,000
Gross Profit 40,000
less Other Expenses 25,000
Net Profit 15,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 50,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 60,000
Gross Profit 40,000
less Other Expenses 25,000
Net Profit 15,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 50,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 50,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 50,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 50,000
Gross Profit 50,000
less Other Expenses 25,000
Net Profit 25,000
Net Profit
Sales
Net Profit
Margin =
25,000
100,000
=
25.0%=

9. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
22.8 NET PROFIT MARGIN
 Net Profit Margin: how to improve it,,,
Last year…
Income Statement $
Revenue 100,000
less Cost of Goods Sold 60,000
Gross Profit 40,000
less Other Expenses 25,000
Net Profit 15,000
Net Profit
Sales
Net Profit
Margin =
15,000
100,000
=
15.0%=
Income Statement $
Revenue 100,000
less Cost of Goods Sold 60,000
Gross Profit 40,000
less Other Expenses 15,000
Net Profit 25,000
Net Profit
Sales
Net Profit
Margin =
25,000
100,000
=
25.0%=
Option 2:  Other Expenses
Income Statement $
Revenue 100,000
less Cost of Goods Sold 60,000
Gross Profit 40,000
less Other Expenses 25,000
Net Profit 15,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 60,000
Gross Profit 40,000
less Other Expenses 15,000
Net Profit 25,000
Income Statement $
Revenue 100,000
less Cost of Goods Sold 60,000
Gross Profit 40,000
less Other Expenses 15,000
Net Profit 25,000

10. © Michael Allison, Trinity Grammar School.
Author’s permission required for external use
TASK
In-class Homework
SQ12 X
SQ13 X
Ex22.2 not (c) X
Ex22.3 not (b) X