Final answer:
The firm's accounting profit is calculated by subtracting the sum of labor, capital, and materials costs from the sales revenue, which results in $50,000. To find the profit margin, this profit is then divided by the sales revenue and multiplied by 100%, giving a profit margin of 5% for the firm.
Step-by-step explanation:
To calculate the firm's profit margin, we need to first understand the concept of profit in the context of a business. Profit margin is a financial metric that assesses a company's profitability by comparing net income (also known as profit) to its sales revenue. The formula for calculating the profit margin is net income divided by sales revenue, expressed as a percentage. In the example given:
Sales revenue = $1,000,000
Labor costs = $600,000
Capital costs = $150,000
Materials costs = $200,000
To calculate the firm's accounting profit, we subtract the total costs (labor, capital, materials) from the sales revenue:
Accounting profit = Sales revenue - Labor costs - Capital costs - Materials costs
Accounting profit = $1,000,000 - $600,000 - $150,000 - $200,000
Accounting profit = $50,000
Therefore, the accounting profit for the firm last year was $50,000. To get the profit margin, we would need to divide this profit by the sales revenue:
Profit margin = (Accounting profit / Sales revenue) x 100%
Profit margin = ($50,000 / $1,000,000) x 100%
Profit margin = 5%
Thus, the firm's profit margin is 5%.