The Scenario:
Suhana decides to sell a sofa set for ₹9600 with a profit margin of 20%. To determine the cost price of the sofa set, we need to understand the concept of profit margin and how to calculate it.
Understanding Profit Margin:
Profit margin is the percentage of profit a business makes on its cost price. It is calculated by dividing the profit by the cost price and multiplying by 100. In this case, Suhana’s profit is 20% of the selling price.
Calculating the Cost Price:
To find the cost price of the sofa set, we need to use the formula:
Cost Price = Selling Price / (1 + Profit Margin %)
Substitute the values into the formula:
- Selling Price = ₹9600
- Profit Margin = 20%
Cost Price = ₹9600 / (1 + 0.20) = ₹8000
Therefore, the cost price of the sofa set is ₹8000.
Real-World Example:
Let’s say a furniture store buys a sofa set for ₹6000 and sells it for ₹7200. The profit margin is 20%.
Cost Price = ₹6000, Selling Price = ₹7200, Profit Margin = 20%
Using the formula:
Cost Price = ₹7200 / (1 + 0.20) = ₹6000
In this case, the cost price matches the initial purchase price of ₹6000.
Case Study:
A retail store sells a sofa set for ₹8000 making a profit of 25%. What is the cost price of the sofa set?
Cost Price = Selling Price / (1 + Profit Margin %) = ₹8000 / (1 + 0.25) = ₹6400
The cost price of the sofa set in this case is ₹6400.
Conclusion:
Calculating the cost price of a product is essential for businesses to determine their profit margins and make informed pricing decisions. Understanding how profit margins work can help businesses maximize their profits and make strategic pricing choices.
