what method calculates gross margin
absorption costing
There are different methods to calculate gross margin, but the most common one is:
Gross Margin = Revenue – Cost of Goods Sold
To calculate gross margin using this method, follow these steps:
1. Determine your total revenue: This is the total amount of money you’ve earned from sales of your products or services.
2. Determine your cost of goods sold (COGS): COGS is the total cost of producing and delivering your products or services. This includes the cost of materials, labor, and any other expenses related to the production process.
3. Subtract your COGS from your revenue: This gives you your gross profit.
4. Divide your gross profit by your revenue: This will give you the gross margin percentage.
For example, if your revenue is $100,000 and your COGS is $60,000, your gross profit is $40,000. Your gross margin percentage is then 40% ($40,000 divided by $100,000). This means that for every dollar of revenue you generate, you keep 40 cents as gross profit.
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