How to Calculate Profit Percentage From Cost & Selling Price

Profit percentage helps understand the financial success of a product or service. It helps individuals and businesses evaluate financial gain relative to initial outlay. This percentage provides a clear picture of profitability for transactions. It serves as a fundamental indicator of economic performance.

Defining the Key Terms

The cost price refers to the total expense incurred to produce or acquire a product or service. This includes the initial purchase price and directly attributable costs such as shipping or manufacturing expenses. For a retailer, it is often the price paid to a supplier.

The selling price represents the amount at which a product or service is offered and sold to the customer. This is the revenue generated from the transaction. It is the full price received before any deductions or discounts are applied.

Profit is the positive financial gain resulting from a transaction. It is the amount by which the selling price exceeds the cost price. This figure signifies the monetary benefit obtained after covering direct expenses associated with the item sold.

Determining the Profit Amount

First, determine the raw monetary profit. This initial step involves a direct subtraction to find the difference between the revenue generated and the expenses incurred.

The formula for calculating the profit amount is: Profit = Selling Price – Cost Price. If an item sells for more than it cost to acquire or produce, the resulting positive number represents the profit. This figure provides the absolute gain from the transaction.

Applying the Profit Percentage Formula

After determining the profit amount, convert this monetary gain into a percentage. This provides a standardized measure of profitability, allowing for easier comparison across different items or periods. The profit percentage is calculated in relation to the cost price, indicating the return on initial investment.

The formula for calculating the profit percentage is: Profit Percentage = (Profit / Cost Price) × 100. In this formula, the profit amount is divided by the cost price. This division shows what proportion of the cost price the profit represents. Multiplying the result by 100 converts this proportion into a percentage. This method highlights the efficiency of a transaction or product line in generating returns based on its initial expense.

Working Through an Example

Consider a business that purchases and sells a product. The business acquires an item for a cost price of $50.00. This cost includes the purchase price from the supplier and any associated delivery fees.

The business then sells this item for a selling price of $75.00. To determine the profit amount, subtract the cost price from the selling price: $75.00 (Selling Price) – $50.00 (Cost Price) = $25.00 (Profit). This means the business gained $25.00 from this transaction.

Next, to calculate the profit percentage, divide this profit amount by the cost price and multiply by 100. So, ($25.00 / $50.00) × 100 = 0.50 × 100 = 50%. This calculation shows that the business made a 50% profit on the item’s cost.