[coolfield7]

In my textbook it gives an explain for profit as a percentage of the cost price and profit as a percentage of the selling price.
It gives an example like this: "A shopkeeper sold an article costing $50 for $60... he makes a profit of $10... find the profit as a percentage of the cost price and profit as a percentage of the selling price."
What does this mean exactly? I know the formula on how to calculate these but what are the points of finding the profit in cost price terms and selling price terms? You get two different percentages but what do they tell you?

Thanks!

[ebaines]

If I understand your question you aren't asking how to claculate these two percentages but rather: why bother? In business profits at the product line level are often stated as "gross margin," which is calculated as gross profit as a percentage of price. Business managers track gross margin to see how the effects of cost and pricing changes affect the profitability of the product line. So from a practical point of view that's a perfectly reasonable calculation to ask you to make. As for calculating profit as a percentage of cost - I suspect it's just an exercise to verify that you know how to calculate percentages - there really isn't much practical use for this perticular calculation.

[coolfield7]

What I want to know is what is profit as a percentage of the selling price. Tell it to me like I'm learning it for the first time. Is it a ratio comparison? And when I look at profit as a percentage of the cost price and then I look at profit as a percentage of the selling price, what's the difference between the two?
Sorry if I confused you in my main post.

Thanks!

[ebaines]

Profit as a pecentage of selling price is a ratio that can help the business understand how it's doing. If Profit/Sell Price is less than zero then they are losing money on every unit they sell. If it equals 0 then they are not making any profit, and given that the business has other overheads and expenses to cover (selling expenses, adminsitrative expenses, etc) they aren't recovering anything to offset those costs and they can't survive for long. So gross margin needs to be positive, as it helps cover overheads and expenses. The largest it can ever be is 100%. Example: If cost is $10 and sell price is $100 then gross margin % = Profit/Price = 90/100 = 90%. This would be a very healthy business, or one with very low cost of goods sold (like software). Conversely a business with cost of $90 and price of $100 would have gross margin % = Profit/Price = 10/100 = 10%. This would be typical of a business that does very large volumes relying on low price to attract customers, such as a grocery store or Walmart.

Profit as a percentage of cost price doesn't tell you much, but as long as selling price is greater than cost price then the math says that profit as a percentage of cost price will be a bigger value than profit as a percentage of selling price. The result can be a number greater than 100%. Using the same examples as earlier: for the first case Profit/Cost= 90/10 = 900% and for the second case Profit/Cost= 10/90 = 11%.

Hope this helps. One thing that may be confusing is understanding the difference between cost and price. Your problem uses the term "cost price," but we usually just call it "cost," and it's the amount the business pays to procure an item to sell. "Selling Price" is usually just called "price" and it's the amount the business sells the item to its customers for. People often use the term "cost" and "price" interchangeably, but it's important to understand that there is a very important difference.

[coolfield7]

Profit as a pecentage of selling price is a ratio that can help the business understand how it's doing. If Profit/Sell Price is less than zero then they are losing money on every unit they sell. If it equals 0 then they are not making any profit, and given that the business has other overheads and expenses to cover (selling expenses, adminsitrative expenses, etc) they aren't recovering anything to offset those costs and they can't survive for long. So gross margin needs to be positive, as it helps cover overheads and expenses. The largest it can ever be is 100%. Example: If cost is $10 and sell price is $100 then gross margin % = Profit/Price = 90/100 = 90%. This would be a very healthy business, or one with very low cost of goods sold (like software). Conversely a business with cost of $90 and price of $100 would have gross margin % = Profit/Price = 10/100 = 10%. This would be typical of a business that does very large volumes relying on low price to attract customers, such as a grocery store or Walmart.


Profit as a percentage of cost price doesn't tell you much, but as long as selling price is greater than cost price then the math says that profit as a percentage of cost price will be a bigger value than profit as a percentage of selling price. The result can be a number greater than 100%. Using the same examples as earlier: for the first case Profit/Cost= 90/10 = 900% and for the second case Profit/Cost= 10/90 = 11%.

Hope this helps. One thing that may be confusing is understanding the difference between cost and price. Your problem uses the term "cost price," but we usually just call it "cost," and it's the amount the business pays to procure an item to sell. "Selling Price" is usually just called "price" and it's the amount the business sells the item to its customers for. People often use the term "cost" and "price" interchangeably, but it's important to understand that there is a very important difference.

Got it! Thanks so much :)