It can be expressed in absolute terms::
or as the ratio of gross profit to sales revenue, usually in the form of a percentage:
Cost of goods sold includes variable and fixed costs directly linked to the product, such as material and labor. It does not include indirect fixed costs like office expenses, rent, administrative costs, etc.
Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income. For a retailer it will be their markup over wholesale.
Larger gross margins are generally good for companies, with the exception of discount retailers. They need to show that operations efficiency and financing allows them to operate with tiny margins.
If a product costs the company $100 to make and they wish to make a 50% profit on the sale of the product they would have to use a markup of 0.5 or 50%. To calculate the price to the customer, you simply take the product cost of $100 and multiply it by (1 + the markup) arriving at the selling price of $150.
Most people find it easier to work with Gross Margin because it directly tells you how many of your sale dollars are profit. In reference to the two examples above:
The $150 price that includes a 50% markup represents a 33% gross margin. As you can see, gross margin is just the percentage of the selling price that is profit. In this case 33% of our price is profit, or $50.
(($150 - $100) / $150 ) * 100 = 33%
In the more complex example of selling price $339, a markup of 66% represents approximately a 40% gross margin. This means that 40% of the $339 is profit. Again, gross margin is just the direct percentage of profit in your sale price.
In accounting, the gross margin refers to sales minus cost of goods sold. It is not necessarily profit as other expenses such as sales, administrative, and financial must be deducted.
Gross Margin (GM) = [Markup/(100+Markup)]*100
Sometimes a salesperson will be asked to use gross margin in their sales. For example, your sales manager may ask that all sales include the cost of the product and the required GM.
'''Selling Price = Cost / (1-GM%)
For example, if your product costs $100 and the required gross margin is 40%, then your Selling Price = $100/(1-0.4) = $100/0.6 = $166.6
($100 / (100% - 40%)) = $166.6