gross margin

Examples of gross margin in the following topics:

• Profit Margin

  • Profit margin measures the amount of profit a company earns from its sales and is calculated by dividing profit (gross or net) by sales.
  • Since there are two types of profit (gross and net), there are two types of profit margin calculations.
  • Net profit is the gross profit minus all other expenses.
  • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
  • The difference between the two is that the gross profit margin shows the relationship between revenue and COGS, while the net profit margin shows the percentage of the money spent by customers that is turned into profit.

• Gross Profit Method

  • The gross profit method uses the previous year's average gross profit margin to calculate the value of the inventory.
  • The gross profit (or gross margin) method uses the previous year's average gross profit margin (i.e. sales minus cost of goods sold divided by sales) to calculate the value of the inventory.
  • Determine the gross profit ratio.
  • Gross profit ratio equals gross profit divided by sales.
  • The gross profit (or gross margin) method uses the previous year's average gross profit margin (i.e. sales minus cost of goods sold divided by sales) to calculate the value of the inventory.

• Basic financial statements

  • The only items that need additional explanation are "Cost of goods sold" and "gross margin".
  • Gross margin is simply the difference between Sales and the Cost of goods sold.
  • It is an important figure for owners to watch, and you will sometimes hear business owners talk about their margins or "managing their margins".
  • The greater the gross margin is the more profitable a business is likely to be.
  • For example, see if you can determine what Bill's gross margin and profit would be if he had to sell his bicycles at a discount because of competitive pressure and his sales revenue for the year amounted to USD 17,000 instead of USD 20,000.

• Profitability analyses (e.g. by customer, product, region)

  • Managers, know, intuitively, that some customers are more profitable than others, that they make more gross margins on some products than others, and if the business has more than just local coverage, that some geographical regions are more profitable than others.
  • Many companies prepare a similar type of analysis at the gross margin level and skip the step of trying to allocate costs to individual customers.
  • In this case, cost of goods sold is substituted for "allocated costs" in column three of Exhibit 40, and column four will show gross margin by customer instead of profitability by customer.
  • For many managers, gross margin by customer gives them the essential information they need without going through the additional step of trying to allocate costs to customers, which is clouded by its inherent inaccuracies.

• Methods in Retail Inventory

  • Note that both the gross margin and the retail inventory methods can help you detect inventory shortages.

• Ratio Analysis and EPS

  • Gross margin, Gross profit margin or Gross Profit Rate: Gross profit / Net sales
  • Profit margin, net margin or net profit margin: Net profit / Net sales

• Revenues

  • This is referred to as gross revenue or sales revenue.
  • There are several financial ratios attached to it, the most important being gross margin and profit margin.

• Uses of the Income Statement

  • An optimally efficient organization will have higher margins in the following areas:
  • Profit margin: A higher net profit as a proportion of sales indicates an overall higher capacity to capture returns on revenue.
  • Operating Margin: Another useful indicator of profitability is operating income over net sales.
  • Comparing this to the overall profit margin can give useful indications of reliance on debt.
  • Another useful indicator is the gross margin.

• Profitability Ratios

  • Thus, the Profit Margin = 10000 / 50000 = 20 percent.
  • Profit Margin: The profit margin is one of the most used profitability ratios.
  • The profit margin is mostly used for internal comparison.
  • A low profit margin indicates a low margin of safety and a higher risk that a decline in sales will erase profits and result in a net loss or a negative margin.
  • Gross Profit Ratio: This indicates what portion of each sales dollar is available to meet expenses and generate profit after taking into account the cost of goods sold.

• Sales Forecast Input

  • Target volume, price, and contribution margin per unit are the key inputs to a sales forecast.
  • Gross sales are the sum of all sales during a time period.
  • Net sales are gross sales minus sales returns, sales allowances, and sales discounts.
  • Gross sales do not normally appear on an income statement.
  • Target Revenue = 100 * [ { Fixed Costs + Target Profits } / Contribution Margin ]