1. What is gross profit margin and what is net profit margin?
2. What are in the between the two?
3. Give a few examples to explain the items between these margins, and show how to analyze these items for improvement directions.
The profit margin is computed as the gross profit margin and the net profit margin. The gross profit margin shows the income earned over the operating activity.
Answer and Explanation:
1. The gross profit margin is computed by deducting the cost of goods sold from the sales revenue. It shows the profit from the operating activity before considering the other than manufacturing expenses.
The net profit margin is computed by deducting the operating expenses (other than manufacturing expense) from the gross profit margin. It shows the net profit earned from the business.
2. Gross profit margin and the net profit margin are very much related to each other as a high gross profit margin means the high net profit margin and a low gross profit margin means a low net profit margin.
3. If the gross profit margin is very high but the net profit margin is low then, the company should put a check on the operating expenses to increase the net profit margin. If the gross profit margin is low but the net profit margin is high then, the company should put a check on the manufacturing expense or purchase cost to increase the gross profit margin.
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from Financial Accounting: Help and ReviewChapter 5 / Lesson 17