What is the definition of margin (return on sales)?

• A. Profit expressed as a percentage of cost.
• B. Profit expressed as a percentage of the selling price.
• C. Profit per unit divided by units.
• D. Total profit divided by total revenue.

Answer: (B)

Margin, in return on sales terms, shows how much profit is earned from each unit of the selling price. It expresses profit as a percentage of what customers actually pay for the product, so it answers: for every pound of selling price, how much is left as profit after costs? For example, if you sell something for 100 and make 25 in profit, the return on sales is 25%. This makes it easy to compare profitability across products with different prices, since the base is the selling price.

Expressing profit as a percentage of cost would be a markup, not the margin on sales. Profit per unit divided by units isn’t a percentage and doesn’t relate to the selling price. Total profit divided by total revenue gives a profit margin relative to revenue, which is a similar idea but the standard phrasing for return on sales emphasizes the percentage of the selling price.