Operating profit margin is the share of revenue left after the cost of goods sold and after overhead. Income tax stays out of this box.
FDIC Money Smart’s profit and loss module writes the statement as revenue minus cost of goods sold, then minus overhead, then minus income tax. The line before tax is operating profit. IRS Publication 334 figures the earlier line, gross profit, as net receipts minus cost of goods sold. The SEC’s beginners’ guide to financial statements walks sales, cost of sales, gross profit, operating expenses, and the bottom line.
The operating profit margin calculator is the middle of that walk:
Operating profit = revenue - COGS - overhead
Operating profit margin = operating profit ÷ revenue
Gross profit, before overhead, is the gross profit margin calculator and the gross margin post. Net profit, after the tax you type, is the net profit margin calculator and the net margin post. A per-unit leftover, before a period’s fixed costs, is the contribution margin calculator.
You type overhead. The page does not pull rent, payroll, or depreciation out of a set of books. These examples are the arithmetic. They are not a close, and they are not tax advice.
Fig 1
Two costs, then a margin
Overhead comes off after cost of goods sold
Subtract cost of goods sold to reach gross profit. Subtract overhead to reach operating profit. Divide that profit by revenue.
Example 1. The FDIC studio
The calculator ships this studio from the FDIC module. Photography sales are $100,000. Supplies and assistant pay, the cost of goods sold, are $10,000. Studio overhead is $40,000. Tax comes later, on the net page.
- Revenue: $100,000
- Cost of goods sold: $10,000
- Overhead: $40,000
Gross profit = 100,000 - 10,000 = $90,000.00. That is 90% of revenue.
Operating profit = 90,000 - 40,000 = $50,000.00.
Operating margin = 50,000 ÷ 100,000 = 50%.
Overhead share = 40,000 ÷ 100,000 = 40%.
Calculator result
Operating profit margin
- Revenue
- $100,000.00
- Cost of goods sold
- $10,000.00
- Overhead (operating expenses)
- $40,000.00
50%
operating profit margin
- Operating profit
- $50,000.00
- Gross profit
- $90,000.00
- Overhead share of revenue
- 40%
Fig 2 · 1/3
The $100,000 of studio sales
FDIC example, before income tax
COGS
$10,000
Overhead
$40,000
Operating profit
$50,000
Cost of goods sold is $10,000, or 10% of sales.
Overhead is $40,000. Operating profit is $50,000, a 50% margin.
Half of each sales dollar is still there after both costs. The gross line said 90 cents. Overhead took 40 of those cents.
Example 2. What if overhead rises?
Keep revenue at $100,000 and cost of goods sold at $10,000. Gross profit stays $90,000.00. Only overhead moves. Each extra $10,000 of overhead is 10 percentage points of this revenue, and $10,000 of operating profit.
- Overhead $20,000: operating profit $70,000.00. Margin 70%. Overhead share 20%.
- Overhead $30,000: profit $60,000.00. Margin 60%. Share 30%.
- Overhead $40,000: profit $50,000.00. Margin 50%. This is example 1.
- Overhead $50,000: profit $40,000.00. Margin 40%. Share 50%.
- Overhead $55,000: profit $35,000.00. Margin 35%. Share 55%.
- Overhead $60,000: profit $30,000.00. Margin 30%. Share 60%.
Fig 3 · 1/6
Margin as overhead rises
Revenue stays $100,000. Cost of goods sold stays $10,000.
Operating margin
- Margin
| Point | Margin |
|---|---|
| $20k | 70% |
| $30k | 60% |
| $40k | 50% |
| $50k | 40% |
| $55k | 35% |
| $60k | 30% |
At $20,000 of overhead the margin is 70%.
At the published $40,000 it is 50%. At $60,000 it is 30%.
A jump from $40,000 to $55,000 removes $15,000 of operating profit. The printed margin goes from 50% to 35%. That is 15 percentage points, because 15,000 ÷ 100,000 = 15%. Scaling the old 50% by the overhead’s own percent change is a different sum, and the formula does not do it.
Example 3. The Publication 334 shop, plus overhead
Publication 334’s shop has $300,000 of net receipts and $200,000 of cost of goods sold. Gross profit is $100,000, a 33.3% gross margin. The gross page stops there. Operating margin needs an overhead figure. Put $60,000 of overhead on that shop.
Operating profit = 300,000 - 200,000 - 60,000 = $40,000.00.
Margin = 40,000 ÷ 300,000 = 13.3%.
Overhead share = 60,000 ÷ 300,000 = 20%.
The gross margin is 33.3%. The operating margin is 13.3%. The 20-point gap is the overhead share. Gross profit of $100,000 becomes operating profit of $40,000 once rent and the rest have been subtracted.
Calculator result
Operating profit margin
- Revenue
- $300,000.00
- Cost of goods sold
- $200,000.00
- Overhead (operating expenses)
- $60,000.00
13.3%
operating profit margin
- Operating profit
- $40,000.00
- Gross profit
- $100,000.00
- Overhead share of revenue
- 20%
If you then type $8,000 of income tax on the net page, net profit = 40,000 - 8,000 = $32,000.00, and the net margin is 10.7%. Operating profit on that card is still $40,000.00. Tax does not move the operating line.
Example 4. A service year with a large overhead share
- Revenue: $240,000
- Cost of goods sold: $12,000
- Overhead: $168,000
Gross profit = 240,000 - 12,000 = $228,000.00.
Operating profit = 228,000 - 168,000 = $60,000.00.
Margin = 60,000 ÷ 240,000 = 25%.
Overhead share = 168,000 ÷ 240,000 = 70%.
Cost of goods sold is 12,000 ÷ 240,000 = 5% of revenue. Almost all of the distance from a huge gross profit to a 25% operating margin is overhead. Payroll, software, and rent live in that 70% if that is where you typed them.
Example 5. A grocery-style book
- Revenue: $500,000
- Cost of goods sold: $425,000
- Overhead: $40,000
Gross profit = 500,000 - 425,000 = $75,000.00, a 15% gross margin.
Operating profit = 75,000 - 40,000 = $35,000.00.
Margin = 35,000 ÷ 500,000 = 7%.
Overhead share = 8%.
Set this next to example 4. The service year has a 25% operating margin and $60,000 of operating profit. This book has a 7% margin and $35,000 of operating profit. The thinner percent also produces less cash here. That pairing is not a rule. Example 3’s 13.3% margin produces $40,000, which is more cash than this 7% and less than the service year’s 25%.
Fig 4 · 1/3
Cost stack on three books
Each column totals that period's revenue
- COGS
- Overhead
- Operating profit
| Category | COGS | Overhead | Operating profit |
|---|---|---|---|
| Studio | $10k | $40k | $50k |
| Shop | $200k | $60k | $40k |
| Grocery | $425k | $40k | $35k |
Cost of goods sold is $10,000, $200,000, and $425,000.
Overhead is $40,000, $60,000, and $40,000. Operating profit is $50,000, $40,000, and $35,000.
The grocery column is the tallest revenue and the thinnest profit slice.
Fig 5 · 1/5
Operating margin on five books
Operating profit divided by that row's revenue
- Operating margin
| Category | Operating margin |
|---|---|
| Grocery | 7% |
| Shop | 13.3% |
| Service | 25% |
| Studio | 50% |
| Double sales | 70% |
The grocery book is 7%. The shop with overhead is 13.3%.
The service year is 25%. The studio is 50%. Doubled studio sales are 70%.
Example 6. An operating loss
- Revenue: $80,000
- Cost of goods sold: $45,000
- Overhead: $50,000
Gross profit = 80,000 - 45,000 = $35,000.00.
Operating profit = 35,000 - 50,000 = -$15,000.00.
Margin = -15,000 ÷ 80,000 = -18.8%.
Overhead share = 50,000 ÷ 80,000 = 62.5%.
Gross profit is $35,000. Operating profit is -$15,000, because overhead is $15,000 larger than that gross profit. The page labels the margin an operating loss margin. Typing $0 of tax on the net calculator leaves the same -$15,000.00 as net profit.
Example 7. Gross, operating, and net on one studio
Use example 1, and add the $10,000 income tax from the net calculator’s published studio.
- Gross profit $90,000.00, margin 90%
- Operating profit $50,000.00, margin 50%
- Net profit = 50,000 - 10,000 = $40,000.00, margin 40%
Calculator result
Net profit margin
- Revenue
- $100,000.00
- Cost of goods sold
- $10,000.00
- Overhead (operating expenses)
- $40,000.00
- Income tax
- $10,000.00
40%
net profit margin
- Net profit
- $40,000.00
- Operating profit
- $50,000.00
- Gross profit
- $90,000.00
Three margins, one revenue figure. Quoting 90% as the profit of the studio skips $40,000 of overhead. Quoting 40% as the operating result puts tax into a line FDIC keeps separate. The operating page is the 50% line.
Example 8. Contribution margin is not this margin
A unit price of $80 and a variable cost of $48 is a 40% contribution ratio: (80 - 48) ÷ 80. The contribution post uses that ratio. It does not know your overhead until you type fixed costs.
Sell 1,000 of those units, and put the same dollars into the operating page.
- Revenue = 80 × 1,000 = $80,000
- Cost of goods sold = 48 × 1,000 = $48,000
- Overhead = $20,000
Gross profit = $32,000.00, which matches total contribution of $32 a unit times 1,000.
Operating profit = 32,000 - 20,000 = $12,000.00.
Operating margin = 12,000 ÷ 80,000 = 15%.
Overhead share = 25%.
The contribution ratio is 40%. The operating margin is 15%. Both numbers are right. They answer different questions. The 40% never subtracted the $20,000. The 15% did.
On the contribution calculator, price $80, variable cost $48, 1,000 units, fixed costs $20,000: ratio 40%, total contribution $32,000.00, after fixed costs $12,000.00, units to cover fixed costs 625. The $12,000 matches operating profit. The percents do not match, because one divides $32 by the $80 price and the other divides $12,000 by $80,000 of revenue.
Example 9. A purchase booked entirely as overhead
The studio in example 1 has $40,000 of overhead and a 50% margin. Suppose an $18,000 equipment purchase was added to overhead in full, so the box reads $58,000.
Operating profit = 100,000 - 10,000 - 58,000 = $32,000.00.
Margin = 32%. Overhead share = 58%.
FDIC’s module spreads equipment through depreciation rather than the full purchase. If this period’s depreciation is $3,000, overhead for the test is 40,000 + 3,000 = $43,000.
Operating profit = 100,000 - 10,000 - 43,000 = $47,000.00.
Margin = 47%. Overhead share = 43%.
The full-purchase version is 15 percentage points lower: 47% - 32% = 15 points, and 15,000 ÷ 100,000 = 15%. The $15,000 is the part of the $18,000 that this period’s depreciation did not take (18,000 - 3,000). The operating page will not compute depreciation. It uses the overhead you type.
Example 10. Same ratio, different cash, and a doubled top line
One month:
- Revenue $20,000
- Cost of goods sold $8,000
- Overhead $7,000
Operating profit = 20,000 - 8,000 - 7,000 = $5,000.00.
Margin = 5,000 ÷ 20,000 = 25%. Overhead share 35%.
The same shape for a year, each line times 12:
- Revenue $240,000
- Cost of goods sold $96,000
- Overhead $84,000
Operating profit = $60,000.00. Margin 25%. Overhead share 35%.
The margin stays 25% because every line scaled. The cash is twelve times larger, $60,000 against $5,000. A 25% month and a 25% year are the same ratio and a different bank balance.
Now change the studio the other way. Double sales and double cost of goods sold, and leave overhead at the original $40,000.
- Revenue $200,000
- Cost of goods sold $20,000
- Overhead $40,000
Gross profit = $180,000.00.
Operating profit = 180,000 - 40,000 = $140,000.00.
Margin = 140,000 ÷ 200,000 = 70%.
Overhead share = 20%.
Example 1 was 50% and $50,000. This is 70% and $140,000. Overhead did not double, so the margin rose. That is the arithmetic of a fixed overhead on a larger receipt total. It is not a forecast that the next year will look like this.
Fig 6 · 1/5
Operating profit in dollars
The percent is in the earlier chart
Operating profit
Grocery
$35,000
Shop
$40,000
Studio
$50,000
Service
$60,000
Double sales
$140,000
The grocery book shows $35,000 of operating profit.
Grocery profit is $35,000. The studio is $50,000. Doubled sales are $140,000.
Example 6’s operating profit is -$15,000.00, a -18.8% margin. The bars above are the positive profit cases from the table.
The books side by side
| Case | Revenue | COGS | Overhead | Operating profit | Margin |
|---|---|---|---|---|---|
| 1. Studio | $100,000 | $10,000 | $40,000 | $50,000.00 | 50% |
| 2. Overhead $55,000 | $100,000 | $10,000 | $55,000 | $35,000.00 | 35% |
| 3. Shop | $300,000 | $200,000 | $60,000 | $40,000.00 | 13.3% |
| 4. Service | $240,000 | $12,000 | $168,000 | $60,000.00 | 25% |
| 5. Grocery | $500,000 | $425,000 | $40,000 | $35,000.00 | 7% |
| 6. Loss | $80,000 | $45,000 | $50,000 | -$15,000.00 | -18.8% |
| 8. Unit book | $80,000 | $48,000 | $20,000 | $12,000.00 | 15% |
| 9. Full equipment | $100,000 | $10,000 | $58,000 | $32,000.00 | 32% |
| 9. Depreciation only | $100,000 | $10,000 | $43,000 | $47,000.00 | 47% |
| 10. One month | $20,000 | $8,000 | $7,000 | $5,000.00 | 25% |
| 10. Doubled sales | $200,000 | $20,000 | $40,000 | $140,000.00 | 70% |
Example 8’s contribution ratio on the same units is 40%, next to this 15% operating margin. Example 7’s net margin on the studio is 40%, next to this 50% operating margin.
When the question is the tax line, open the net profit calculator and type the tax. When the question is one unit’s price gap, open the contribution margin calculator.