Gross margin is the difference between net sales and
cost of goods sold
the cost of goods sold (COGS).
To calculate gross margin, the formula is:
Gross Margin = Net Sales – Cost of Goods Sold
Net Sales refer to the total revenue generated by a company from the sales of its products or services. This amount does not take into account any expenses or deductions.
Cost of Goods Sold (COGS) refers to the direct expenses associated with producing or purchasing the products or services that a company sells. This includes the cost of materials, labor, and any other expenses directly related to the production or acquisition of the product.
By subtracting the COGS from the net sales, a company can determine how much profit it has made from the sale of its products or services before deducting any other expenses such as overhead costs, marketing expenses, and taxes.
In conclusion, gross margin is an important metric used by companies to measure their profitability and efficiency in producing and selling their products or services. A high gross margin indicates a company is generating a good profit margin, while a low gross margin suggests there could be some inefficiencies in the production process.
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