GROSS MARGIN CALCULATION: Formula & How to Calculate It

Gross Margin Calculation
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Gross margin calculation, also known as the gross profit margin, is the metric used to analyze a company’s profit after selling its products. It is a method of calculating how much profit a company has left after deducting the direct costs of selling its goods and services. It also helps to determine how much revenue a company generates despite its expenses. However, the gross margin calculation formula is usually expressed in a percentage. The higher the margin percentage, the more effective management is at generating revenue for every additional dollar. In this article, we will look at how to calculate gross margin using the gross margin calculation formula, the retail gross margin calculation, and how to use excel to calculate gross margin.

Gross Margin Calculation Formula

Experts use the gross margin calculation formula to assess a company’s financial health by calculating the amount of money remaining from product sales after deducting the cost of goods sold (COGS). However, the gross margin calculation formula can be expressed as a percentage by dividing gross profit by gross revenue and multiplying the result by 100. The percentage figure represents the portion of revenue that the company can keep as profit. Where:

  • Gross revenue is the total amount of money the company earns from the sale of its goods and services. 
  • Gross profit is the amount of profit the business earns after deducting all costs, such as manufacturing costs.

How To Calculate Gross Margin

To calculate gross margin, first, identify each variable in the formula and then fill in the values. The income statement includes both total revenue and costs of goods sold.

Below are the steps for calculating gross margin:

  • Calculate total revenue.
  • Determine the cost of goods sold.
  • Merge the variables to determine the gross margin.

#1. Calculate Total Revenue

Begin by calculating the total revenue for the specific time frame. You can calculate the figure by multiplying the total quantity of goods put up for sale by the price at which they were sold. If you sold 100 plates at $150 each, your total revenue would be $15,000. The total revenue formula, where Q = quantity, P = price, and TR = total revenue which is Q = TR (P)

#2. Determine The Cost Of Goods Sold.

The cost of goods sold (or COGS) is the direct cost of producing or manufacturing a product, such as labor or raw material costs. COGS definitions vary depending on the source, but in most cases, it does not include operating expenses or indirect costs such as taxes or professional services.

To determine the cost of goods sold, subtract the value of inventory at the end of the period from inventory at the beginning of the period plus any purchases. COGS is also known as the cost of goods sold or the cost of sales. It is solely the cost of the items you sold, including the direct labor and materials you use to produce them. Though utilities and indirect expenses like marketing and bookkeeping are important in how you distribute your resources, they are not part of the COGS. Below is the formula for COGS:

  • COGS = Beginning Inventory + Period Purchases – Period Ending Inventory

#3. Combine The Variables To Determine The Gross Margin

After calculating total revenue and cost of goods sold. You will have to combine these figures using the gross margin formula to determine the gross margin calculation. The percentage you calculate is the amount of money you keep for each dollar you sell. For instance, if your profit margin is 17%, your gross profit per dollar is 17 cents.

Each factor works together to inform business leaders about how they are managing their resources and provides them with a figure to focus on when developing strategic goals.

However, depending on the metrics you’re evaluating, you can either use the gross margin formula for the calculation. Gross margin is expressed as a percentage, whereas gross profit is expressed as a dollar amount during the calculation.

For example, if a company has $1,000,000 in sales and $750,000 in the cost of goods sold, the gross margin is $250,000 and the gross margin percentage is 25%. A company’s income statement may include the gross margin percentage in the calculation.

Gross Margin Calculation Percentage

This method allows you to calculate your gross profit percentage and thus what your sales contribute to your company’s income. The amount you sell items for above their cost is your gross profit. You can calculate your gross profit percentage if you buy an item for 70 cents and sell it for $1.50. Subtract the purchase price from the selling price.

So $1.50 minus 70 cents for retail gross margin calculation gives 80 cents. This is your net profit. You will have to divide the gross profit amount by the selling price. As a result, 80 divided by 1.50 equals 53. To calculate the percentage, multiply by 100. The 53 multiplied by 100 equals 53%. Your gross profit is 53% of your sales.

Retail Gross Margin Calculation

A retail vendor purchases goods from wholesale and resells them at retail. Because of competition, retailers usually have small profit margins which are challenging most times. What they do is closely monitor the margin. Because the gross profit margin is the most basic indicator of the health of your company. The retail gross margin calculation allows you to determine your cost of goods sold which is your gross profit margin.

Gross Margin Calculation Tools To Measure Retail Performance

GMROII, GMROS, and GMROL are some tools that you can use in the retail analysis.

  • GMROII: Gross Margin Return On Inventory Investment 
  • GMROS stands for Gross Margin Return On Space.
  • GMROL stands for Gross Margin Return On Labor.

Gross Margin Calculation Excel

Gross margin calculation in excel has several built-in functions and operators for calculating total cost, revenue, and gross margin. However, if you’re a retailer you’ll need to examine the differences in wholesale options to boost your profit margins and give your business a competitive advantage. The following is how gross margin calculation is done in excel.

#1. Insert The Gross Margin Calculation Formula In Excel

Insert the starting values into the spreadsheet to convert this to an Excel spreadsheet. Put the net sales figure in cell A1 and the cost of goods sold in cell B1. Then, in cell C1, enter the following formula to calculate the gross profit margin: =(A1-B1)/A1.

When you enter that calculation into the cell and press enter, the gross profit margin appears in cell C1. Remember that you can use any cell in the spreadsheet for this calculation; simply replace A1 and B1 in the formula with the cells you chose for net sales and cost of goods sold.

Furthermore, you can use Excel’s formatting options to switch from decimal to percent and back if you want it to be in percentage. But if you select cell C1, you can choose whether the number appears as a decimal (for example, 0.1) or as a percentage (for example, 1% ).

#2. Use the SUM() Function

The sum function is used to calculate the total cost of your product. However, excel calculates gross margin by using a combination of functions. The SUM() function adds the values in a column or row. In the appropriate column, use the SUM() function to calculate the total wholesale cost of your products. Then, using the SUM() function, calculate the total revenue you generate by selling the products. Use these figures in financial reports that require detailed cost and revenue information.

#3. Calculate Gross Profit Quantity

Excel provides operators to perform various calculations in addition to functions. To calculate the gross profit, use the subtraction operator. For example, if your total wholesale cost is in cell A1 and your revenue is in cell B1, enter “=B1-A1” without the quotation marks into a new cell to calculate your gross profit. To add a currency symbol to your quantity, click the number type drop-down box and select the appropriate currency.

#4. Gross Profit Percentage

Using Excel’s division operator, calculate the gross profit percentage. Using the previous example, if your gross profit is in cell C3, enter the formula “=C3/B1” to calculate the percentage. This formula indicates the percentage that goes with the profit of your retail price. You can use this calculation to determine whether a lower-cost item is a better deal.

How To Determine A Good Gross Margin

Generally, a gross margin of 10% to 20% is a good average to high gross margin to aim for, but the ideal gross margin a business should aim for varies by industry. Profit margins of less than 10% are common in industries such as grocery retail, home care, and retail clothing. Profit margins of 15% or higher are typical in industries such as bookkeeping, vehicle rentals, and dentistry.

On the face of it, a gross profit margin ratio of 50 to 70% would be considered healthy, and it would be for many types of businesses, like retailers, restaurants, manufacturers, and other producers of goods. Although a gross profit margin of 50% may be considered low for businesses such as financial institutions, law firms, or other service industry companies.

In contrast, gross profit margins in the high-90 percent range are common for law firms, banks, technology companies, and other service industry companies. This is because service firms usually have lower production costs than manufacturers of goods. 

Factors That Affect Gross Margin:

  • Direct material costs: Manufacturer prices can fluctuate, affecting the cost of your commodities.
  • Direct labor cost: The number of human resources you need to produce your product tends to raise or lower your labor costs.
  • Inventory method: Accounting can be a less expensive way of valuing inventory, resulting in a lower starting inventory in the first purchase. However, it can be more expensive if you purchase it last. Each metric has an effect on your COGS, which causes your gross margin to shift up or down.
  • Sales prices/quantities: The availability of raw materials influences both your costs and how much you can sell them for.

Gross Margin Calculation FAQs

How do I calculate a 30% margin?

To calculate a 30% margin, divide 30% by 100 to get 0.3. Then subtract 0.3 from 1 to get 0.7. Finally divide the price of the item by 0.7. The figure you receive is the amount you must sell the item for to make a 30 percent profit margin.

How do you calculate margin between cost and selling price in Excel?

To calculate the margin between cost and selling price in excel, subtract the cost of the product from the sale price, and use the formula “=(A2-B2).” The difference is your overall profit

What is included in gross margin?

Gross margin includes net sales minus the cost of goods sold. The gross margin represents the profit made before deducting selling, general, and administrative (SG&A) expenses.

Does gross margin include salaries?

Is the gross margin inclusive of salaries?
Direct materials and direct labor are the primary costs included in the gross profit margin. Costs such as depreciation, amortization, and overhead are not included in the gross profit margin.

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