Percentage profit is a way of expressing profit as a percentage rather than cash, used for setting prices, evaluating investments, and identifying gains or losses. It can be calculated by dividing the cash gain by the original purchase price. Businesses use it to set minimum profit margins, while investors use it to project expected returns on investments.
Percentage profit is the expression of profit as a percentage rather than cash. This method of identifying profit can be used for a variety of functions, such as setting the price of goods and services sold or evaluating the performance of investments. Calculating percentage profit is a relatively simple task and can also be employed in real estate deals or as a means of identifying a percentage increase or loss in contributions to non-profit organizations.
One of the easiest ways to understand how percentage profit works is to consider selling a home. Ideally, the idea is to earn some profit from the sale. By comparing the purchase price of the home to the price the realtor believes the home would command in today’s market, it is possible to arrive at a percentage of the return the owner will realize once the sale is completed.
For example, if the home was purchased for a total of $100,000 in United States Dollars (USD) and the proposed sale price was set at $150,000 USD, the sale would produce a cash profit of $50,000 USD, assuming the property was sold at the asking price. Dividing the cash gain by the original purchase price of $100,000 USD determines that the realized percentage gain on the transaction will amount to 50%. The owner can determine if this level of return is sufficient or if he wishes to take the home off the market until property values rise and a higher percentage profit can be made from the sale.
In a business setting, a business will often take steps to ensure that a minimum percentage profit is made for each unit sold. This is determined by identifying the total cost associated with producing each unit for sale. From there, you can identify a reasonable yield and use that percentage to set your final purchase price. For example, if the total cost of manufacturing a unit is $10 USD and the manufacturer wishes to earn a 25% profit from the sale of that unit, they would arrive at the unit retail price by dividing the cost by 25%, then adding that amount to the total cost. This would mean that to make a 25% percentage profit, the retail price for each unit produced would be set at $12.50 USD.
Investors can also use the same basic approach when buying or selling investments. If the investor wishes to buy only investments that are more likely to generate a specific percentage return, he will project the expected return on an investment, based on all known factors. If your investment is likely to produce a percentage return within a reasonable time frame, you may place an order to buy the security. If the percentage return projections are less than the desired level of return, the investor may decline to buy the stock and seek other investment opportunities.
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