Focusing on Margin — the Catalyst of Profit

By Consumer Dummies

The following figure includes a very important line of information: margin — both margin per unit and total margin. Margin is your operating profit before fixed expenses are deducted. Don’t confuse this number with gross margin, which is profit after the cost of goods sold expense is subtracted from sales revenue but before any other expenses are deducted.

Profit analysis template for a profit center.
Profit analysis template for a profit center.

With the information shown in hand, you can dig into the reasons that margin per unit increased from $22.66 in fiscal year 2012 to $25.00 in fiscal year 2013. Two favorable changes occurred: The sales price per unit increased, and the product cost decreased — no small achievement, to be sure! However, the gain in the gross profit per unit was offset by unfavorable changes in both variable operating expenses. The profit center manager must keep on top of these changes.

As a manager, your attention should be riveted on margin per unit, and you should understand the reasons for changes in this key profit driver from period to period. A small change in unit margin can have a big impact on operating earnings.