how to calculate gross margin
RevenuesCost of goods sold:Beg. inventory Var. Manuf. costsAllocated fixed manuf. costsCost of goods available for saleLess: Ending inventoryAdjustment for production-volume varianceCost of goods soldGross margin
Gross margin is a financial metric used to measure the profitability of a company’s products or services, expressed as a percentage of revenue. It represents the difference between the revenue earned from the sale of a product or service and the direct costs associated with producing that product or service.
The formula for calculating gross margin is:
Gross Margin = (Revenue – Cost of Goods Sold) / Revenue x 100%
Here’s how to calculate gross margin:
Step 1: Determine the revenue earned from the sale of a product or service. This is the total amount of money generated by sales.
Step 2: Calculate the cost of goods sold (COGS) associated with producing that product or service. This includes all direct costs such as raw materials, labor, and manufacturing overhead.
Step 3: Subtract the COGS from the revenue to obtain the gross profit.
Gross Profit = Revenue – COGS
Step 4: Divide the gross profit by the revenue and multiply by 100% to get the gross margin expressed as a percentage.
Gross Margin = (Gross Profit / Revenue) x 100%
For example, if a company generates $1,000 in revenue from the sale of a product with COGS of $600, the gross profit is $400. Dividing the gross profit by the revenue and multiplying by 100%, we get a gross margin of 40%.
Gross Margin = ($400 / $1,000) x 100% = 40%
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