Let's dig a bit deeper into the concept but using an example with the fictitious transportation company, ABC Industries. ABC is the maker of planes, trains, and automobiles. Unfortunately for the consumer, ABC Industries only produces a standard version of each product. ABC Industries accounts for the expenses of each product separately.
Planes:
Sale price of $350,000 per plane
Projected demand of 100 units this year
Expenses are projected to be 50% of the sales price
Trains:
Sale price of $200,000 per box car
Projected demand of 50 units this year
Expenses are projected to be $150,000 per unit
Automobiles:
Sale price of $15,000 per car
Projected demand of 1,000 units this year
Expenses are projected to be 75% of the sales price
In the next year, ABC Industries expects sales of planes to double, while sales of trains to decline by 50%. Automobile sales are expected to remain constant. ABC does not intend to alter the price of the products, nor do they expect expenses per unit to change. Let's calculate next year's profit potential for the owners of ABC Industries.
ABC Industries Profit Potential

ABC Industries can review the gross margin percentage on each of their products. Gross margin percentage is the percentage of profit to revenue. Gross margin can be calculated as:
Planes: $35,000,000 / $70,000,000 = 50% gross margin percentage
Trains: $1,250,000 / $5,000,000 = 25% gross margin percentage
Automobiles: $3,750,000 / $15,000,000 = 25% gross margin percentage
Overall: $40,000,000 / $90,000,000 = 44.44% gross margin percentage
Provided costs remain constant, ABC Industries may want to place additional focus on planes, as the sale of a plane is more profitable to the company than the sale of a train or automobile. Alternatively, ABC Industries may want to find ways to increase profitability on train and automobile sales to increase the overall gross margin percentage of the company.
Lesson Summary
Profit potential is the potential for a product to generate revenue, which, after expenses, leads to net income. Profit potential is represented by the formula, I x (PE) = PP, where:
I = inventory or potential demand, in units
P = sale price per unit
E = expenses per unit
PP = profit potential
Another way to view the formula is that expected revenue less expenses equals profit potential. Companies can use gross margin percentage, or the percentage of profit to revenue, to compare profitability among products. When reviewing profit potential, it's important to highlight the importance of the word potential, as this formula is nothing more than a projection. It should not be construed as a guarantee.
Basic Terminology
Highlighted Words 
Definitions 
Profit potential 
the potential for a product to generate revenue which, after expenses, leads to net income 
Expected revenue 
less expenses equals profit potential 
Gross margin percentage 
the percentage of profit to revenue 
Learning Outcomes
Along with understanding of this lesson should come the ability to:
 Define profit potential
 Use gross margin percentage
 Determine how to calculate for profit potential