Understanding Gross Profit Margin And Its formula

Understanding Gross Profit Margin and its formula – Gross Profit Margin is the profitability ratio used to calculate the percentage of excess gross profit to sales revenue.

Gross Profit referred to Sales revenue reduced by Cost of Goods Sold (COGS). Costs included in the Cost of Goods Sold (COGS) include raw materials and direct labor associated with the manufacture of a product. In other words, Gross Profit Margin Ratio or Gross Profit Margin is used to measuring how efficiently a company uses its materials and labor to produce and sell its products to make a profit.

This Gross Profit Margin is an important indicator because it can provide information to Management and Investors about how profitable business activities are carried out by a company without calculating indirect costs. This Gross Profit Margin can also provide investors with insights into the company’s actual level of health.

How to Calculate Gross Profit Margin

The following is the formula for calculating Gross Profit Margin and an example case of its calculation.

Gross Profit Margin Formula ( Gross Profit Margin )

To get a Gross Profit Margin, we need to get the first Gross Profit, Gross Profit is the total sales revenue minus the Cost of Goods Sold (COGS).

Gross Profit = Sales Revenue – Cost of Goods Sold

After getting a Gross Profit, the next is to distribute the Gross Profit with the total Sales Revenue.

Gross Profit Margin = Gross Profit / Sales Revenue

Information:

Cost of Goods Sold (COGS ) is all costs incurred to produce goods sold or acquisition price of goods sold. Costs for forming COGS include raw material costs, direct labor costs, and overhead costs.

Sales Revenue is the amount of money a company receives from selling products or services to its customers.

Example of Gross Profit Margin Calculation

ABC is a company that produces uniforms. Total sales of uniforms in 2016 amounted to $. 400,000.000, while the Cost of Goods Sold (HPP) is $ 150,000,000. What is Gross Profit Margin or Gross Profit Margin?

Note:

Sales Revenue = $ 400,000,000 –
Cost of Sales (COGS) = $ 150,000,000 –
Gross Profit Margin =?

Calculating Gross Profit

Gross Profit = Sales Revenue – Cost of Goods Sold
Gross Profit = $ 400,000,000 – $ 150,000,000
Gross Profit = $ 250,000,000

Calculating Gross Profit Margin

Gross Profit Margin = Gross Profit / Sales Revenue
Gross Profit Margin = $ 250,000,000 / $ 400,000,000
Gross Profit Margin = 62.5%

The percentage of gross profit margin shows that ABC has 62.5% of the remaining income after paying direct costs associated with the production of uniforms (Cost of Goods sold for uniforms). Gross Profit of $ 250,000,000, – this is the remaining money that can be used to pay operational costs, interest, taxes, debt payments, dividend payments and other needs.

An assessment of the Gross Profit Margin

A company that has a high Gross Profit Margin shows that the company is able to run its production efficiently because its Cost of Sales is relatively lower when compared to sales, the higher the gross profit margin the better the operating condition of the company.

Conversely, a low Gross Profit Margin indicates that the company is less able to be able to control production costs and the cost of goods sold, the lower the gross profit margin the less good the operating condition of the company.

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