Gross Margin indicates a ratio or percentage of the revenue a company or organization generates against every direct cost that is occurring during the production of a product or service.
The measurement of this margin includes subtracting the COGS (Costs of Goods Sold) from the revenue and then dividing the whole amount by revenue to get the actual percentage or ratio.
Here is the formula to calculate the Gross Margin-
Revenue − COGS
Gross Profit Margin = ----------------------------------------------
Revenue
Gross margin is often shown in the income statements of any company or organization. The calculation demonstrates the performance of that particular company like how much revenue they can generate after subtracting all upstanding costs like labor expense, raw materials or amortization expenses, however, it doesn't include operational costs or administrative costs which are indirect, in nature.
For example, in the month of April, the net sales of Coca-cola are $400 million and the COGS (costs of goods sold) are $250 million. To calculate the gross margin of Coca-cola, the following formula can be used to subtract the COGS $250 from the net sales or revenue $400 and divide it by the revenue $400. By implementing the formula, we can have this result-
$400 − $250
Gross Profit Margin = ----------------------- = 37.5%
$400
Use of the Term in Sentences
- The term “Gross Margin” is generally shown in income statements of companies where it indicates the profitability ratio and performance of that particular organization.