Profit+Margin+for+a+Distributor+Vs.+a+Manufacturer+by+Gail+Sessoms

Profit Margin for a Distributor Vs. a Manufacturer by Gail Sessoms

 Businesses calculate their profit margins for a defined period as the ratio of profit to revenue. The profit margin reveals the degree to which a company can pay its expenses and generate profits from the sale of its products or services. Calculations for profit margins depend in part on the business type and the product or service sold. Manufacturers and distributors are involved in wholesale and retail sales. Manufacturers make products. Distributors buy products from manufacturers and sell them to individuals or other businesses. Profit margins for all businesses are based on the proportion of expenses to revenue.  

Profit Margins
A company’s profit margin demonstrates the health of its finances and the efficiency of its operations. Management decisions, such as product pricing and controlling expenses, affect profitability. The three types of profit margins – gross, operating and net – involve different types of expenses. However, each measures profitability against revenue by adjusting for expenses, which can vary greatly between distributors and manufacturers. The gross profit margin -- which measures profit after subtracting the cost of making the goods -- helps manufacturers track the costs directly related to making and selling the product. Distributors focus on the difference between what the company pays for a product and the price at which the product sells. The larger the difference between the two numbers -- which is called the spread -- the greater the profit. 

Expenses
Manufacturing expenses used to calculate gross profit margin include direct labor costs, which are the wages and benefits of the workers who make the product, such as machine operators or assemblers. Manufacturing overhead includes costs related to the manufacturing facility, including insurance, taxes, salaries for indirect labor and equipment. Manufacturers also have operating costs, which are indirect costs that are not related directly to the making of the product and are similar to those a distributor might incur. A distributor’s expenses include the purchase price of the product, the cost of shipping to receive the product, expenses related to inventory management and administrative overhead. 

Pricing
Manufacturers and distributors price their products to achieve the greatest profit margin possible. Some manufacturers use cost-plus pricing, which adds the desired profit percentage to the total of the costs for materials, direct labor and overhead. A product that costs $120 to make must sell for $150 to realize a 20 percent profit margin for the manufacturer. Distributors often use the markup method, which involves adding a predetermined percentage to the company’s purchase price to arrive at the price for customers. A distributor might purchase a product for $10 and sell it for $20, for a 50 percent markup. Some distributors consider the purchase price of the product and the shipping costs to receive the product when determining pricing. 

Manufacturers Vs. Distributors
The calculation for gross profit margin is revenue minus direct costs divided by revenue. For instance, a manufacturing company sells a product for $10,000 after generating $6,000 in direct costs, which leaves a gross profit of $4,000. Divide 4,000 by 10,000 for a gross profit margin of 40 percent. The distributor that buys the $10,000 product must factor in the acquisition cost when determining the gross profit margin. The costs may include shipping, delivery and overhead. The distributor’s gross profit margin is the difference between the cost of the goods and the total sales.