In this section:
Application: Organic Flavors
States :
Saveurs Bio is a company specializing in the distribution of organic food products. The company wants to analyze its profitability by calculating its net margin for the year 2022. Here are some key data: turnover amounts to €500, cost of goods sold to €000, operating expenses are €300 and taxes amount to €000. Saveurs Bio wants to improve its strategy in order to maximize its net margin.
Work to do :
- Calculate the gross margin of Saveurs Bio.
- Determine the operating result of the company.
- Calculate net income before taxes.
- From the information provided, calculate the net margin after taxes.
- Discuss ways in which Saveurs Bio could improve its net margin.
Proposed correction:
-
Gross margin is calculated by subtracting the cost of goods sold from sales revenue. So, Gross margin = $500 – $000 = $300. Gross margin shows how much the company makes on its sales after paying the cost of goods sold.
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Operating profit is obtained by subtracting operating expenses from gross margin.
Operating profit = €200 – €000 = €120.
Operating income indicates how effectively the company controls its operational costs. -
Net income before tax is obtained by removing operating expenses from the gross margin.
Net profit before tax = €80 – €000 = €20.
This represents the profitability of the company before taxes are deducted.
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Net margin is net income after tax divided by turnover, expressed as a percentage.
Net margin = (€60 ÷ €000) x 500 = 000%.
Net margin reveals what percentage of each euro earned remains in the business after all expenses. -
Saveurs Bio can improve its net margin by reducing operating costs, negotiating lower prices for its products, or increasing its selling prices. Optimizing logistics and investing in marketing can also boost sales while keeping costs low.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Revenue – Cost of goods sold |
| Operating result | Gross margin – Operating expenses |
| Net profit before tax | Operating result – Taxes |
| Net margin | (Net profit after tax ÷ Turnover) x 100 |
Application: InnovTech
States :
InnovTech, an innovative startup in Internet of Things technology, needs your expertise to assess its financial performance. In 2022, it recorded a turnover of €1, production costs of €200, administrative and commercial expenses reaching €000, and taxes of €600. InnovTech is looking to develop a strategy to increase its net profitability.
Work to do :
- Calculate InnovTech's gross margin.
- Determine the startup's operating profit.
- Calculate net income before taxes.
- Evaluate InnovTech's net margin after taxes.
- Suggest strategic actions that could be implemented to improve net margin.
Proposed correction:
-
Gross margin is obtained by deducting production costs from turnover:
Gross margin = €1 – €200 = €000.
This amount is crucial to understanding the company's gross profitability relative to its production costs. -
Operating profit is calculated by subtracting administrative and commercial expenses from gross margin.
Operating profit = €600 – €000 = €250.
This shows the profitability of the company after operational expenses. -
Net profit before tax is obtained by subtracting taxes from operating profit.
Net profit before tax = €350 – €000 = €50.
This indicator reflects financial performance before taxes are levied.
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Net margin is calculated by dividing net income after tax by turnover, multiplied by 100.
Net margin = (€300 ÷ €000) x 1 = 200%.
This illustrates the percentage of revenue that remains in the business after all deductions. -
InnovTech could increase its net margin by automating certain tasks to reduce operational costs, by developing higher-margin products, or by optimizing its supply chain to reduce production costs.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Turnover – Production cost |
| Operating result | Gross margin – Administrative and commercial expenses |
| Net profit before tax | Operating result – Taxes |
| Net margin | (Net profit after tax ÷ Turnover) x 100 |
Application: EcoSphere
States :
EcoSphère, a company specializing in the manufacture of ecological cleaning products, wants to analyze the efficiency of its operations in terms of net margin. For the year 2022, the company achieved a turnover of €800, with a cost of raw materials of €000, personnel costs of €400, and fixed costs of €000. Taxes amount to €150 for this period.
Work to do :
- Calculate the gross margin of the EcoSphère company.
- Evaluate the operating costs of the business.
- Calculate net income before taxes.
- Deduct the net margin after taxes for EcoSphère.
- Analyze how changes in raw material costs could affect net margin.
Proposed correction:
-
Gross margin is obtained by subtracting the cost of raw materials from sales.
Gross margin = €800 – €000 = €400.
This figure indicates how much the company would retain if it only had to pay the costs of raw materials. -
Operating costs include personnel costs and fixed costs:
Operating costs = €150 + €000 = €100.
This is the total cost of operations before taxes. -
To calculate net income before taxes, subtract operating expenses from gross margin:
Net profit before tax = €400 – €000 = €250.
This represents profitability before taxes are deducted.
-
Net margin is calculated by dividing net income after tax by turnover, multiplied by 100.
Net margin = (€150 – €000) ÷ €30 x 000 = 800%.
This reflects the share of turnover retained after taxes. -
If raw material costs increase, gross margin will decrease, which could reduce net margin if the increases are not offset by increases in selling prices or reductions in other costs.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Turnover – Cost of raw materials |
| Operating costs | Personnel costs + Fixed costs |
| Net profit before tax | Gross margin – Operating costs |
| Net margin | ((Net profit before taxes – Taxes) ÷ Turnover) x 100 |
Application: Vêt'Nature
States :
Vêt'Nature, a company specializing in eco-friendly clothing, monitors its financial profitability. Over the past year, their turnover was €750, the cost of materials was €000, and overheads were €350. Tax expenses were €000.
Work to do :
- Determine the gross margin of Vêt'Nature.
- Calculate the total operating costs.
- Calculate net income before taxes.
- Evaluate the net margin after taxes for the company.
- Consider how a marketing strategy might impact net margin.
Proposed correction:
-
Gross margin is calculated by subtracting the cost of materials from revenue:
Gross margin = €750 – €000 = €350.
This demonstrates Vêt'Nature's gross profitability before deduction of operating costs. -
Operating costs here are the company's general costs:
Operating costs = €250.
These costs represent the expenses to keep the business running. -
Subtracting operating expenses from gross margin gives net income before taxes:
Net profit before tax = €400 – €000 = €250.
This amount is the profitability before taxation.
-
To obtain the net margin after tax, we divide the net profit after tax by the turnover:
Net margin = (€150 – €000) ÷ €40 x 000 = 750%.
This figure shows the final profit retained in the business after all expenses. -
An effective marketing strategy could increase sales, thereby increasing revenue without necessarily increasing costs proportionally, which could improve net margin.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Revenue – Cost of materials |
| Net profit before tax | Gross margin – Operating costs |
| Net margin | ((Net profit before tax – Tax charges) ÷ Turnover) x 100 |
Application: Zenith Solar
States :
Zenith Solaire is a company dealing with the installation of solar panels. For an improvement of their financial strategy this year, the analysis of their performance from the net margin is crucial. In 2022, they recorded a turnover of €1, material costs of €500, operational expenses of €000, and taxes of €800.
Work to do :
- Calculate the gross margin of Zenith Solaire.
- Evaluate the company's operating results.
- Deduct the net income before taxes.
- Evaluate the net margin after taxes.
- What would you suggest to Zenith Solaire to optimize its costs without sacrificing quality?
Proposed correction:
-
Gross margin is calculated by subtracting material costs from revenue:
Gross margin = €1 – €500 = €000.
This expresses the initial profitability of the company on its sales. -
To obtain the operating result, operating expenses must be removed from the gross margin:
Operating profit = €700 – €000 = €400.
This calculation measures the efficiency of Zenith Solaire's operations without taxes. -
Net profit before tax is operating profit less taxes:
Net profit before tax = €300 – €000 = €60.
This is the performance indicator before taxation.
-
Net margin after tax is calculated from net income and turnover:
Net margin = €240 ÷ €000 x 1 = 500%.
This percentage gives a clear view of profitability after all expenses. -
Zenith Solaire could optimize its costs by analyzing each expense item to find potential savings when purchasing materials in bulk, by partially automating its operating process or by training staff to increase efficiency.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Revenue – Material costs |
| Operating result | Gross Margin – Operating Expenses |
| Net profit before tax | Operating result – Taxes |
| Net margin | (Net profit before tax ÷ Turnover) x 100 |
Application: Cooking & Health
States :
Cuisine & Santé is dedicated to food products that promote a healthy lifestyle. With the increase in competition, the management wants to assess its financial situation for the year 2022. The company's revenues reached €900, while the cost of producers was €000, its expenses included €500, and its annual taxes were €000.
Work to do :
- Calculate the gross margin of Cuisine & Santé.
- Determine total operating injuries.
- Calculate net income before taxes.
- Deduct the net margin after taxes.
- Suggest initiatives that Cuisine & Santé could adopt to maintain its market share while maximizing its profitability.
Proposed correction:
-
Gross margin is obtained by subtracting the cost of products from turnover:
Gross margin = €900 – €000 = €500.
This figure remains after the direct cost of goods has been subtracted from sales. -
Operating expenses include all operational expenses:
Operating expenses = €250.
These are the costs necessary to keep the business running before taxes. -
To calculate net income before taxes, subtract operating expenses from gross margin:
Net profit before tax = €400 – €000 = €250.
This represents profit before taxes are applied.
-
The net margin after tax is calculated as follows:
Net margin = (€150 – €000) ÷ €50 x 000 = 900%.
This percentage reveals how much the company actually keeps after deducting all expenses. -
Cuisine & Santé could collaborate with health influencers to strengthen customer loyalty, expand its product range to meet more food trends, and diversify its distribution channels to increase sales.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Turnover – Producer Cost |
| Net profit before tax | Gross margin – Operating expenses |
| Net margin | ((Net profit before tax – Taxes) ÷ Turnover) x 100 |
Application: Urban Fashion
States :
Mode Urbaine, a ready-to-wear brand, wants to review its profitability to strengthen its expansion plans. In 2022, turnover was €1, the cost of supplies reached €000, operating expenses were €000, and tax amounted to €500.
Work to do :
- Evaluate the gross margin of Urban Fashion.
- Calculate the operating profit of the company.
- Calculate net income before taxes.
- Deduct the net margin after taxes.
- Analyze how the addition of a new product line could impact Urban Fashion's net profitability.
Proposed correction:
-
Gross margin is calculated by subtracting the cost of supplies from sales:
Gross margin = €1 – €000 = €000.
This measure provides an indication of funds available after payment of the cost of supplies. -
For operating income, subtract operating expenses from gross margin:
Operating profit = €500 – €000 = €350.
This amount illustrates the operational efficiency of Mode Urbaine. -
Net profit before tax is obtained by removing tax from operating profit:
Net profit before tax = €150 – €000 = €70.
It is a pre-tax performance indicator.
-
To deduct the post-tax net margin:
Net margin = €80 ÷ €000 x 1 = 000%.
This shows the residual profit for every euro generated in sales. -
Adding a new product line could increase revenue, but it could also incur upfront costs. If demand for the new product is strong, net profitability could see a significant increase.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Revenue – Cost of supplies |
| Operating result | Gross margin – Operating expenses |
| Net profit before tax | Operating result – Taxes |
| Net margin | (Net profit before tax ÷ Turnover) x 100 |
Application: BioNature
States :
BioNature offers natural cosmetics. To improve its market position, the company is examining its net margin. In 2022, BioNature generated a turnover of €600, declared production and logistics costs of €000, assumed operating expenses of €300, and paid taxes of €000.
Work to do :
- Calculate BioNature's gross margin.
- Determine the total operating expenses.
- Evaluate the net income before taxes.
- Calculate the net margin after tax for BioNature.
- Suggest ideas that could help BioNature improve its net margin.
Proposed correction:
-
Gross margin is calculated by subtracting production and logistics costs from turnover:
Gross margin = €600 – €000 = €300.
This measure expresses how much remains after covering direct production costs. -
Operating expenses include all operating expenses:
Operating expenses = €150.
This amount is necessary for the day-to-day running of the company. -
To assess net income before tax:
Net profit before tax = €300 – €000 = €150.
This translates profitability taking into account operational expenses.
-
The net margin after tax is deduced as follows:
Net margin = (€150 – €000) ÷ €30 x 000 = 600%.
This figure illustrates the proportion of turnover that remains after all expenses. -
BioNature could achieve economies of scale by increasing production, exploring less expensive distributor alternatives, or automating certain processes in order to lower production costs and increase its net margin.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Turnover – Production and logistics costs |
| Net profit before tax | Gross margin – Operating expenses |
| Net margin | ((Net profit before tax – Taxes) ÷ Turnover) x 100 |
Application: PureTech
States :
PureTech, a company dedicated to research and development in water purification, wants to know its financial profitability to anticipate its expansion strategy in 2023. For the year 2022, the turnover was €2, project costs reached €000, operating expenses were €000, and taxes amounted to €1.
Work to do :
- Calculate PureTech's gross margin.
- Determine the operating result of the company.
- Calculate net income before taxes.
- Deduct the net margin after tax for PureTech.
- Suggest methods for PureTech to improve its operational efficiency and net margin.
Proposed correction:
-
Gross margin is calculated by deducting project costs from revenue:
Gross margin = €2 – €000 = €000.
This amount is essential for analyzing the gross revenue generated by the company before charges. -
The operating result is obtained by subtracting operating expenses from the gross margin:
Operating profit = €800 – €000 = €500.
This calculation provides a view of profitability after taking into account operating expenses. -
Net profit before tax is calculated as follows:
Net profit before tax = €300 – €000 = €100.
This measure indicates profits before tax deduction.
-
To deduct the net margin after taxes:
Net margin = €200 ÷ €000 x 2 = 000%.
This provides a clear understanding of the percentage of revenue remaining in the business after all expenses. -
PureTech could improve its operational efficiency by adopting innovative technologies to reduce project costs, revising its supplier contracts for better conditions or by investing in training its staff to improve their performance.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Turnover – Cost of projects |
| Operating result | Gross margin – Operating expenses |
| Net profit before tax | Operating result – Taxes |
| Net margin | (Net profit before tax ÷ Turnover) x 100 |