Operating Profit Margin Formula

Operating Profit Margin Formula (Table of Contents)

• Operating Profit Margin Formula
• Operating Profit Margin Formula Calculator
• Operating Profit Margin Formula in Excel (With Excel Template)

Operating Profit Margin Formula

Operating Profit margin is a ratio which measures profitability and the efficiency for controlling the cost and expenses related to the operations of the business. It provides an overview to customers that how much profit the company can make after paying all the variable costs.

The formula for calculating Operating Profit Margin is as follows:

Examples of Operating Profit Margin Formula

Let’s assume the following details has been taken from the income statement of Anand Group Inc.

• Gross Sales – $65,000
• Sales Return- $5,000
• Cost of Goods Sold- $25,000
• Labour $12,000

General & Admin Expenses-$8000

To calculate the Operating Profit Margin of Anand Group Inc, we need two things:

1. Net Sales and
2. Operating Profit

Net Sales can be calculated by deducting Sales return from the Gross Sales, i.e.,

• Net Sales = Gross Sales – Sales Return
• Net Sales = $65,000 – $5,000
• Net Sales = $60,000

Operating profit can be calculated by deducting all the variable expenses from Gross Profit.

Where,

• Gross Profit = Net Sales- Cost of Goods Sold
• Gross Profit = $60,000 – $25,000
• Gross Profit = $35,000

And

• Operating Profit = Gross Profit – Variable Costs (Labour Expense + General & Admin Expenses)
• Operating Profit = $35,000 – ($12,000 + $8000)
• Operating Profit =$35,000 – $20,000
• Operating Profit = $15,000

By using the two inputs we can calculate the Operating Profit Margin as follows

• Operating Profit Margin Formula = (Operating Profit / Net Sales) x 100
• Operating Profit Margin = ($15,000 / $60,000) x 100
• Operating Profit Margin = 25%

Explanation of Operating Profit Margin Formula

To Calculate Operating Profit Margin, we need Operating Profit & Net Sales.

The first component is operating profit.

Operating Profit is used to calculate how much profit Company will make from its core business. It is sometimes called EBIT. Operating profit includes income from core operations of any business before taking taxes into consideration and excluding other income from investments. It helps in measuring the firm’s efficiency to control the costs & helps in running its operations effectively.

Operating Profit = Gross Profit – Variable Costs (Labour Expense + General & Admin Expenses)

The second component is Net Sales.

Net Sales can be calculated by deducting Sales return from the Gross Sales. Gross sales are the total revenue. When we deduct sales returns & sales discount from Gross sales, we get the Net Sales figure. We can get the above figures from the Income statement of any company.

Net Sales = Gross Sales – Sales Return – Sales Discount – Allowances

To calculate the Operating Profit Margin, we need to compare the operating profit to the net sales.

Significance and Use of Operating Profit Margin Formula

Operating Profit margin formula is used to measure the Company’s operating efficiency and pricing strategy. It provides an overview to customers that how much profit the company can make after paying all the variable costs. Operating profit margin cannot be used as stand-alone analysis. We need to compare the ratios from previous years to find the deviations whether a company’s margin is improving or not.

Operating profit margin of a company can be used as a base to compare from its past performance and with their competitors. The companies with higher operating profit margin can offer a competitive pricing i.e., they can offer lower prices than their competitors. Operating profit margin shows whether the Sales volume is in level to the fixed costs of production or not. Companies which have a high operating profit margin, they can pay the interest on debt and their fixed cost easily and can even survive the economic downturns easily. High operating profit margin is preferred as it shows a company’s earnings per dollar of sales, the higher the margin, the higher the return.

Operating Profit Margin Calculator

You can use the following Operating Profit Margin

Operating Profit Margin Formula in Excel (With Excel Template)

Here we will do the same example of the Operating Profit Margin formula in Excel. It is very easy and simple. You need to provide the two inputs of Net Sales and Operating Profit

You can easily calculate the Operating Profit Margin using Formula in the template provided.

First, we need to calculate Net Sales

Then we need to find out the gross profit. To find the gross profit, we need to deduct the cost of goods sold from the net sales.

Then to find out operating profit.

then we need to calculate operating profit margin using formula.

Recommended Articles

This has been a guide to an Operating Profit Margin formula. Here we discuss its uses along with practical examples. We also provide you with Operating Profit Margin Calculator with downloadable excel template. You may also look at the following articles to learn more –

1. Contribution Margin and Gross Margin | Key Differences
2. Comparison – Revenue vs Profit
3. Guide to Key Marketing Objectives
4. Pricing Strategies in Marketing
5. Advantages & Disadvantages of Operating Ratio
6. Contribution Margin Income Statement