Ramadevi has a small crafts factory. She makes wooden dolls and sells them.
It costs her 3 rs for the wood, and about 2 rs for the paint. The dress for the doll costs 6 rs. If a worker makes the dolls, she charges 4 rs per doll as her making charge.
The dolls are sold for 45 rs. each.
To sell her dolls, she has put up a billboard at the bus stand. This billboard costs her 1000 rs per month.
On an average, she sells 500 dolls per month.
What is the Gross Profit?
Her cost of production is – Cost of wood + cost of paint + Cost of dress + craftsperson cost =
3 + 2+ 6 + 4 = 15 rs.
Her Sale Price is 45 rs.
So, if she had to do nothing except making and selling, she would make 45 – 15 = 30 rs per doll.
This is her Gross Profit.
What is Gross Profit Margin?
You have all done this in Grade 5 maths. Gross profit margin is nothing but profit %age.
= Profit / Cost Price * 100
= 30 / 15 * 100 = 200 %
What is Net Profit?
Ramadevi, however, does not just make and sell dolls. There are many other costs attached to running a business. For example, that billboard at the bus stop. She also has to pay her accountant. These costs have to be paid from the business only.
So, as the next step, she subtracts all these costs from her total profit.
If she sells 500 dolls a month and makes 30 rs per doll, her total margin per month is = 500 * 30 = 15000. Out of this, she pays 1,000 rs per month for the billboard.
Her net profit becomes:
15000 – 1000 = 14,000.
What is net profit margin?
Total Profit = 14,000
Total Cost of Selling = 1000 + 15 * 500 (Cost of Production) = 1000 + 7500 = 8500.
Net Profit Margin = 14,000 / 8500 * 100 = 164%