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Gross Margin

What is Gross Margin?

Gross Margin is a profitability ratio that measures Gross Profit as a percentage of total revenue. Typically, it is calculated as Gross Profit divided by revenue.

Alternate names: Gross Profit Margin, Markup

How to calculate Gross Margin

ƒ Sum(Gross Profit) / Sum(Revenue)

Example

If a florist has a revenue of $15,000 and Cost of Goods Sold is $6,000, their Gross Margin will be: ($15,000 - $6,000) / $15,000 = 60%

More about this metric

Gross Margin is the percentage of profit made by a company after the costs incurred in making a product are subtracted from the sales revenue. Gross Margin is typically expressed as a percentage, by dividing Gross Profit by Revenue.

Gross Margin is typically included in a company’s income statement. Executives use it as an indication of how efficiently a company is using its resources. If labor and supply costs are high, then Gross Margin will be low. Usually, Gross Margin does not include fixed costs or costs that the company will incur regardless of output.

Although Gross Profit may increase over time, Gross Margin percentage may not. You need to look at both the absolute value (in dollars) and percentage value (by dividing Gross Margin by Revenue) for a true understanding of your metric. Since Gross Margin does not consider fixed costs, it does not provide a complete picture of profitability, which is why it must be tracked alongside other profitability metrics.

Metrics related to Gross Margin

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