Final answer:
Profit margin, also known as average profit, refers to net profit margin, gross profit margin, or operating profit margin, depending on the costs considered. It is essentially the profit divided by the quantity of output, indicating the profitability level of a company.
Step-by-step explanation:
Profit margin is commonly referred to in different contexts, each addressing a specific type of profitability in a business. The term profit margin can describe different financial metrics, depending on the figures it takes into account. For example:
- Net profit margin considers the net profit (accounting profit) which is total revenues minus all expenses, including taxes, interest, and depreciation.
- Gross profit margin looks at the difference between sales and the cost of goods sold, without accounting for other expenses like overhead, taxes, or interest.
- Operating profit margin takes into account the profit a company makes on its core business operations before subtracting taxes and interest charges.
The term 'profit margin' could most accurately be linked to 'average profit,' which is the profit divided by the quantity of output produced.
Average profit is calculated as price minus average cost, which represents the firm's profit margin. It indicates that if the market price is above average cost, average profit, as well as total profit, will be positive. Conversely, if the market price is below average cost, then the firm will incur losses.