How to Calculate Profit Margin | 11 Exercises

Application: Gourmet Pastry

States :

La Pâtisserie Gourmande is a local bakery offering a variety of fine pastries. Currently, it is focusing on a flagship product: a fresh fruit tart. The sales price excluding tax (PV HT) of this tart is €20, and the purchase price excluding tax (PA HT) is €12. It sold 500 tarts last month and aims to improve its margin.

Work to do :

1. Calculate the unit margin in euros for each pie sold.
2. Determine the margin rate for each pie.
3. Calculate the overall margin for the last month.
4. Estimate the effect on the unit margin if the purchase cost decreases by €1.
5. Consider the possible strategic implications of a 5% increase in the PV HT.

Proposed correction:

1. The unit margin is calculated by subtracting the purchase price excluding tax (PA HT) from the sale price excluding tax (PV HT). That is, unit margin = PV HT – PA HT = €20 – €12 = €8. Each pie sold brings a margin of €8.

2. The margin rate is obtained using the formula: ((PV HT – PA HT) ÷ PA HT) x 100. By applying, this gives ((20 – 12) ÷ 12) x 100 = 66,67%. This means that each pie has a margin rate of 66,67%.

3. The overall margin is calculated by the product of the unit margin and the quantity sold. Overall margin = Unit margin x quantity sold = €8 x 500 = €4. Thus, the total margin achieved last month is €000.

4. If the purchase cost decreases by €1, the new AP excluding tax would be €11. The new unit margin would then become €20 – €11 = €9. This cost reduction would increase the margin by €1 per pie.

5. Increasing the PV excluding VAT by 5% would bring it to €21. The new unit margin would then be €21 – €12 = €9, with a new margin rate of ((21 – 12) ÷ 12) x 100 = 75%. This strategy could improve profitability if demand remains stable, but could reduce sales volume if customers consider the price too high.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Overall margin	Unit margin x quantity sold

Application: The Wines of the Sun

States :

Les Vins du Soleil is a winery specializing in regional wines. Its most popular wine is sold at a price excluding tax of €15 per bottle, and its purchase cost excluding tax is €9. During the previous quarter, 1 bottles were sold.

Work to do :

1. What is the unit margin for each bottle sold?
2. Calculate the margin rate for this wine.
3. What is the overall margin achieved during the quarter?
4. If the purchase price increases by 10%, what will the new unit margin be?
5. Analyze the strategy of maintaining the current price in the face of increasing purchasing costs.

Proposed correction:

1. The unit margin for each bottle is given by the difference between the PV excluding tax and the PA excluding tax: Unit margin = €15 – €9 = €6. Thus, each bottle sold generates a margin of €6.

2. The margin rate can be determined by the formula ((PV HT – PA HT) ÷ PA HT) x 100. Here, this gives ((15 – 9) ÷ 9) x 100 = 66,67%. This margin rate is significant for this product.

3. The overall margin is the product of the unit margin by the number of bottles sold. Overall margin = €6 x €1 = €200. The winery therefore made a margin of €7 on this wine during the quarter.

4. A 10% increase in the purchase price would bring it to €9 x 1,1 = €9,9. The new unit margin would become €15 – €9,9 = €5,1.

5. Maintaining the selling price in the face of increasing costs could reduce the unit and overall margin. However, it helps to support sales while remaining competitive. It is crucial to weigh margin risks against maintaining market share.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Overall margin	Unit margin x quantity sold

Application: The Flowers of Clemence

States :

Les Fleurs de Clémence is a floral company renowned for its exclusive compositions. Its star bouquet is sold at a price excluding VAT of €50, with a purchase cost excluding VAT of €30. In the last quarter, 300 bouquets were sold.

Work to do :

1. Calculate the unit margin for each bouquet.
2. Determine the markup rate for this bouquet.
3. What is the overall margin obtained last quarter?
4. If it wants to offer a 10% commercial discount on the PV excluding VAT, how does this affect the unit margin?
5. What would be the sales reduction strategy if management chooses to increase the number of bouquets sold by 40%?

Proposed correction:

1. The unit margin is calculated as follows: Unit margin = PV HT – PA HT = €50 – €30 = €20. Therefore, each bouquet sold generates a margin of €20.

2. The markup rate is calculated by the formula: ((PV HT – PA HT) ÷ PV HT) x 100. Which gives ((50 – 30) ÷ 50) x 100 = 40%. This shows that 40% of the sale price is margin.

3. The overall margin is obtained by multiplying the unit margin by the quantity sold: €20 x 300 = €6. The company has therefore generated an overall margin of €000.

4. With a 10% discount on the PV excluding VAT, the new price would be €50 x 0,9 = €45. The new unit margin then becomes €45 – €30 = €15. This reduction affects the unit margin by €5.

5. A discount to stimulate sales could lead to an increase in sales. If sales increase by 40%, this means 300 x 1,4 = 420 bouquets. The overall margin would become €15 x 420 = €6. The strategy could be beneficial if it significantly increases the sales volume to compensate for the decrease in unit margin.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100
Overall margin	Unit margin x quantity sold

Application: Elite Sport

States :

Sport Elite, a chain of sporting goods stores, sells running shoes at a price excluding VAT of €120, while their purchase cost is €80. Sales of these shoes amount to 250 pairs for the last month.

Work to do :

1. What is the unit margin for each pair of shoes sold?
2. Calculate the markup for these shoes.
3. What is the overall margin for last month?
4. If the selling price increases by 15%, how does this impact the unit margin?
5. Provide an analysis of the potential effects of the price change on sales and profitability.

Proposed correction:

1. The unit margin is calculated by: Unit margin = PV HT – PA HT = €120 – €80 = €40. The margin per pair sold is therefore €40.

2. The margin rate is calculated using the formula: ((PV HT – PA HT) ÷ PA HT) x 100. Thus, the calculation gives ((120 – 80) ÷ 80) x 100 = 50%. This means that half of the initial cost is added as a margin.

3. For the overall margin achieved, we multiply the unit margin by the total number of sales: €40 x 250 = €10. Hence a gross margin of €000 for the last month.

4. If we increase the selling price by 15%, the new PV excluding VAT would be €120 x 1,15 = €138. The new unit margin would therefore be €138 – €80 = €58. The positive impact on the unit margin would be an increase of €18.

5. Increasing the PV HT could increase profitability per unit. However, it could also reduce demand if customers perceive the new price as too high. The analysis should include customer reaction and align with the company's overall strategy.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Overall margin	Unit margin x quantity sold

Application: Precise Computing

States :

Informatique Précis sells laptops at a price excluding VAT of €700. The purchase price excluding VAT for these computers is €450 per unit. During the last semester, they sold 600 units of their most popular model.

Work to do :

1. What is the unit margin for each computer sold?
2. Calculate the markup rate of these laptops.
3. What is the overall margin achieved over the half-year?
4. Imagine that the manufacturer offers a 5% discount on the purchase cost; what would be the new unit margin?
5. Analyze the implications of offering such a discount for the overall sales strategy.

Proposed correction:

1. The unit margin per computer is obtained by subtracting the HT PA from the HT PV: Unit margin = €700 – €450 = €250. Thus, each computer sale generates a margin of €250.

2. The markup rate is calculated as follows: ((PV HT – PA HT) ÷ PV HT) x 100 = ((700 – 450) ÷ 700) x 100 = 35,71%. This means that 35,71% of the selling price corresponds to the margin.

3. The overall margin can be obtained by: Unit margin x quantity = €250 x 600 = €150. Informatique Précis therefore made an overall margin of €000 on these sales.

4. A 5% discount on the purchase cost makes the new PA excluding tax equal to €450 x 0,95 = €427,5. Thus, the new unit margin is €700 – €427,5 = €272,5.

5. Offering a discount can cushion the effects of expected sales declines because it widens the difference between cost and selling price, thereby improving profit per unit sold. The impact on sales volume and customer loyalty should be studied.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100
Overall margin	Unit margin x quantity sold

Application: Ephemeral Modes

States :

Modes Éphémères is a mid-to-high-end fashion brand. Their new collection features a winter coat sold at €300 excluding VAT, with a unit purchase cost of €180. At the launch of the collection, they sold 800 coats.

Work to do :

1. Calculate the unit margin of this coat.
2. What margin rate does this coat have?
3. What overall margin was achieved by launching this collection?
4. Predict the result if the purchase cost is affected by a €20 discount. How is the unit margin influenced?
5. How could the pricing strategy be adjusted if the trend towards high fashion changes, favoring a more affordable style?

Proposed correction:

1. The unit margin is calculated as follows: Unit margin = PV HT – PA HT = €300 – €180 = €120. This means that each coat generates a margin of €120.

2. Using the formula ((PV HT – PA HT) ÷ PA HT) x 100, the margin rate is ((300 – 180) ÷ 180) x 100 = 66,67%. This figure indicates that a significant portion of the cost is added for margin.

3. The overall margin is obtained by the expression: Unit margin x quantity sold = €120 x 800 = €96. The brand made a total margin of €000 on this coat.

4. With a reduction of €20, the PA HT is now €180 – €20 = €160. The new unit margin becomes €300 – €160 = €140, an increase of €20 per unit.

5. Adapting pricing strategy to match a style and market segment may require rethinking costs or branding. Reducing price can deepen demand, but maintaining differentiation by quality and style is vital to preserving the premium image.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Overall margin	Unit margin x quantity sold

Application: Bistro du Coin

States :

Le Bistro du Coin, renowned for its regional cuisine, offers a lunch menu at a price excluding tax of €25, with a cost price of €15. Over the last month, 1 menus have been sold.

Work to do :

1. What is the unit margin for each formula?
2. Calculate the markup rate applied to this formula.
3. What is the overall margin obtained from sales of the lunch formula?
4. Consider the impact on unit margin if the cost price drops by €3.
5. What would be the advantages or disadvantages of offering a promotional offer on the lunch menu at €20 excluding tax?

Proposed correction:

1. The unit margin for each formula is calculated by: Unit margin = PV HT – PA HT = €25 – €15 = €10. Each formula sold therefore generates a margin of €10.

2. The markup rate is given by the formula ((PV HT – PA HT) ÷ PV HT) x 100, or ((25 – 15) ÷ 25) x 100 = 40%. This percentage shows how much of the final sale comes back as margin.

3. For the overall margin, it is: Unit margin x quantity = €10 x 1 = €000. The restaurant therefore made a total margin of €10.

4. If the cost drops by €3, the new cost price is €15 – €3 = €12. The new unit margin would thus become €25 – €12 = €13, marking an increase in the margin of €3 per formula.

5. Offering a promotion at €20 excluding VAT would lower the unit margin to €20 – €15 = €5. While this offer may increase traffic and visibility, it could also substantially reduce profitability if there is not a proportional increase in sales.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100
Overall margin	Unit margin x quantity sold

Application: Start-Up Tech

States :

Start-Up Tech develops and markets management software sold at a price excluding VAT of €1. Development and distribution costs amount to €000 per unit. During the previous year, 600 software programs were sold.

Work to do :

1. Calculate the unit margin for each software.
2. What is the markup rate applied to this software?
3. What is the overall margin achieved over the past year?
4. What would the unit margin be in the event of a 10% increase in the price excluding VAT?
5. Consider the strategic implications of a partnership offering a 20% cost reduction.

Proposed correction:

1. The unit margin for software is given by: Unit margin = PV HT – PA HT = €1 – €000 = €600. Each software sold therefore generates a margin of €400.

2. The markup rate is obtained with the formula: ((PV HT – PA HT) ÷ PV HT) x 100, or ((1 – 000) ÷ 600) x 1 = 000%. This suggests that a significant percentage of the sale price is retained for the margin.

3. The overall margin is calculated as follows: Unit margin x quantity = €400 x 150 = €60. Start-Up Tech therefore had a cumulative margin of €000.

4. By increasing the price excluding VAT by 10%, the new PV excluding VAT would be €1 x 000 = €1,1. The new unit margin would become €1 – €100 = €1, which represents an additional gain of €100 per sale.

5. A partnership that cuts costs by 20% would bring the unit cost closer to €600 x 0,8 = €480. With an unchanged PV of €1, the new unit margin would be €000 – €1 = €000. This could make the company more competitive while increasing its profitability.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100
Overall margin	Unit margin x quantity sold

Application: Elegance Jewelry

States :

Bijoux Élégance is a designer of contemporary jewelry. A flagship necklace is sold for €200 excluding tax, with a manufacturing cost of €125. 400 necklaces have been sold in the last two months.

Work to do :

1. What is the unit margin of each necklace?
2. Determine the margin rate for this collar.
3. What is the overall margin generated in this period?
4. What happens to the unit margin if the manufacturing cost decreases by €15?
5. Discuss the long-term effects of continued declines in manufacturing costs on business strategy.

Proposed correction:

1. The unit margin is calculated by doing: Unit margin = PV HT – PA HT = €200 – €125 = €75. Each necklace therefore generates a margin of €75.

2. The margin rate is found with: ((PV HT – PA HT) ÷ PA HT) x 100, which gives ((200 – 125) ÷ 125) x 100 = 60%. The collar therefore has a favorable margin rate.

3. The overall margin is obtained by: Unit margin x quantity = €75 x 400 = €30. Bijoux Élégance has a total overall margin of €000 for this period.

4. If the manufacturing cost drops by €15, the new cost would be €125 – €15 = €110. The unit margin would therefore be €200 – €110 = €90, an increase of €15 per necklace.

5. A continued decline in manufacturing costs can strengthen the competitive position by making margins wider without changing the PV HT. This would also allow prices to be adjusted for a more competitive market without affecting profitability.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Overall margin	Unit margin x quantity sold

Application: Flavors of the World

States :

Saveurs du Monde is an online sales company specializing in rare spices. A pack of spices is sold at €25 excluding VAT, with a purchase price excluding VAT of €10. In the last quarter, 1 packs were delivered to customers.

Work to do :

1. Calculate the unit margin achieved for each pack.
2. What is the markup rate obtained for this product?
3. What overall margin was achieved during the quarter?
4. If the selling price is reduced by 10%, how does the unit margin change?
5. Evaluate the strategic consequences of a price reduction policy to increase market penetration.

Proposed correction:

1. The unit margin is: Unit margin = PV HT – PA HT = €25 – €10 = €15. Thus, each pack brings a margin of €15.

2. The markup rate is calculated as follows: ((PV HT – PA HT) ÷ PV HT) x 100 = ((25 – 10) ÷ 25) x 100 = 60%. This shows that a significant proportion of the price is devoted to the margin.

3. For the overall margin, we use: Unit margin x quantity = €15 x €1 = €200. An overall margin of €18 was achieved.

4. A 10% reduction in the PV excluding VAT would bring the new price to €25 x 0,9 = €22,5. The new unit margin would therefore be €22,5 – €10 = €12,5, i.e. a reduction of €2,5.

5. Reducing prices can encourage an increase in sales volume, thereby increasing market share. However, it is crucial to monitor profitability, so the additional volume must compensate for the decrease in unit margin.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Brand taxes	((PV HT – PA HT) ÷ PV HT) x 100
Overall margin	Unit margin x quantity sold

Application: Electronic Fusion

States :

Fusion Electronics sells high-tech televisions at a price excluding VAT of €1. The acquisition cost for each television is €500. The company managed to sell 900 units in the last year.

Work to do :

1. What is the unit margin for each TV sold?
2. Determine the margin rate for these TVs.
3. What overall margin was obtained over the year?
4. If a marketing campaign involves a €100 reduction in acquisition cost, how does the unit margin change?
5. Discuss the impact of a year of continually lowering purchase prices on the company's competitive position.

Proposed correction:

1. The unit margin per television is calculated with: Unit margin = PV HT – PA HT = €1 – €500 = €900. Each television sold generates a margin of €600.

2. The margin rate is determined by: ((PV HT – PA HT) ÷ PA HT) x 100 = ((1 – 500) ÷ 900) x 900 = 100%. This indicates how much the initial cost is increased to establish the selling price.

3. The overall margin is: Unit margin x quantity sold = €600 x 300 = €180. The company therefore achieved an overall margin of €000.

4. With a €100 reduction in the acquisition cost, the net PA is then €900 – €100 = €800. The new unit margin becomes €1 – €500 = €800, which is an improvement of €700.

5. Continuously lowering purchasing costs strengthens the margin without affecting the PV. This gives Electronique Fusion greater competitiveness through the ability to pass on more aggressive prices or invest the savings in other strategic areas, such as innovation or customer service.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Margin rate	((PV HT – PA HT) ÷ PA HT) x 100
Overall margin	Unit margin x quantity sold