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.