Expand his output to increase profits, Henry, a perfectly competitive lime grower in southern california, notices that the market price of limes is greater than his marginal cost.
The term "profit margin" refers to the ratio of a company's annual profit to its annual sales or costs. A business with a profit margin of 10% on a product line that brought in $100,000 in sales and $200,000 in costs has a profit margin of 5% on that same product line.
As a result, the profit margin will vary depending on whether profit is compared to sales or to costs.
The return on investment, also known as the return on investment rate, is calculated by dividing the profit by the capital expenditure needed to manufacture the good.
This number provides an indicator of the profit realized after deducting capital expenses. The rate of profit is 2% if the product line with $10,000 in sales required an investment of $500,000 in plant and equipment costs.
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