Profit margin is calculated as Profit Margin = Total Profits / ________.

Profit margin is calculated as Profit Margin = Total Profits / ________.

• A. Total Sales
• B. Total Costs
• C. Total Revenue
• D. Net Income

Answer: (A)

Profit margin shows how much of every dollar of sales remains as profit. The correct calculation uses profit divided by sales (revenue). This denominator represents the amount generated from selling goods or services, so the ratio shows profitability relative to the sales activity. If you divided by total costs, you’d get a different metric that isn’t the standard margin. Using the denominator as total revenue or net income would misstate the concept, since margin is about profit relative to the sales generated. Example: if profit is 25,000 and sales are 250,000, the profit margin is 25,000 / 250,000 = 0.10, or 10%.

Profit margin shows how much of every dollar of sales remains as profit. The correct calculation uses profit divided by sales (revenue). This denominator represents the amount generated from selling goods or services, so the ratio shows profitability relative to the sales activity. If you divided by total costs, you’d get a different metric that isn’t the standard margin. Using the denominator as total revenue or net income would misstate the concept, since margin is about profit relative to the sales generated.

Example: if profit is 25,000 and sales are 250,000, the profit margin is 25,000 / 250,000 = 0.10, or 10%.