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A gross profit margin of 0.33:1 means that for every
dollar in sales, you have 33 cents to cover your basic
operating costs and profit.
Some business owners will use an anticipated gross
profit margin to help them price their products. While
other factors -- such as competition and demand -- may
play into pricing decisions, a gross profit margin is
a good starting point for product pricing. For example,
if a product costs $8 to produce, and your gross profit
margin is 20 percent, you can calculate your pricing
by dividing your cost by (1-.0.2). In this case, $8
divided by .8 would yield a price of $10.
You can also use your gross profit margin ratio to
help you set and monitor sales goals for your company.
Because costs for raw materials, labor and manufacturing
expenses all play into your profit margin ratio, a change
in this ratio over time could mean it's time to look
for new suppliers or review your pricing structure.
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