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Chart · Pricing & Margin

Profit and Margin Bases Reference

Compare revenue, gross profit, contribution and operating profit in one hypothetical sale, with the correct denominator for each percentage.

By PriceAndProfit Editorial Updated

This bridge follows a single hypothetical product through different profit boundaries. In this example all cost of goods sold is variable, and the $50 selling cost is also variable. That assumption lets the contribution subtotal be reconciled directly with gross profit. A business with fixed manufacturing cost in inventory needs a different bridge.

Each margin = its defined profit measure ÷ net sales; markup = gross profit ÷ COGS
Hypothetical worked values; no market or statutory rates
MeasureCalculation on this exampleResult
Net sales 10 units × $50 $500
Gross profit $500 − $300 COGS $200
Gross margin $200 ÷ $500 40%
Markup on COGS $200 ÷ $300 66.67%
Contribution $500 − $300 variable COGS − $50 variable selling costs $150
Contribution ratio $150 ÷ $500 30%
Operating profit $150 − $100 fixed period costs $50
Operating margin $50 ÷ $500 10%

How to read and reuse this example

Read the labels before comparing percentages. The 40% gross margin and 30% contribution ratio both use sales as the denominator, but they subtract different costs. The 66.67% markup uses cost instead. The $50 operating profit is still not net income after every possible charge and says nothing about when the customer pays.

Boundaries and exceptions

Use this layout to map your own accounts and remove any duplicate expense. Collecting $500 now while paying the supplier next month would change cash timing without changing this unit-cost arithmetic. At zero revenue, report the dollar loss separately and leave margin undefined. These values are illustrative, not recommended ratios.

Method reference: SEC: Beginners' Guide to Financial Statements. Checked October 22, 2026. Income, balance-sheet and cash-flow measures have different boundaries.

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