I sold a pair of shoes last week a \$150.00. The cost is \$100.
My profit margin for last week is 33% (Revenue – Cost) / Revenue
What if the customer returned the shoes?
Is my profit margin $0$ or negative? (Revenue – Cost) / Revenue?
What if I sold 3 pairs of shoes to a customer at \$150.00 each. (The cost of each is $100)… and the customer returned 1 pair. How do I calculate my profit margin?
Best Answer
If the person returns the shoes for a full refund, then your profit margin equation becomes $$\frac{0-100}{0}$$ Which is an undefined quantity, so I would say that if they return the shoes, there was essentially no sale, and so it doesn't really make sense to talk about profit margins. If you want to define this as $0$ (no sale implies 0 profit margin), you could probably argue that effectively.
If they only return 1, then it's like you only sold 2, so you should be able to calculate that. It is definitely possible for a profit margin to be negative.