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Definition

Gross Profit Margin

What is Gross Profit Margin?

Gross Profit Margin is an income generated from offering goods and services before expenditures not primarily associated with production are deducted, and it is commonly stated as a proportion of income.

It is a profitability measure used mostly by management teams to analyze the productivity and quality of a business and its products.

Understanding Gross Profit Margin

The gross margin may not provide a perfect assessment of the firm's business model, but it does provide an idea of profitability. A corporation may be unable to meet its operations and other costs and plan for the long term if the gross margin is insufficient. 

The gross profit margin is calculated as the ratio of sales. Usually better the margins, the more advantageous the sales, because a lower portion of the selling is utilized to meet the company's fundamental expenses. 

It solely stands for expenditures linked with the commodities directly, not any administrative expenses incurred in the course of running the firm. Assessing the company's sustainability necessitates taking a step beyond and estimating the net profit.

The gap between overall sales and the cost of products sold is divided by total income, and the result is expressed as a percentage.

 

Gross Profit Margin = (Total Revenue – Cost of Goods Sold) / Total Revenue x 100

 

On the appearance, this profit margin ratio of 50-70% would appear to be beneficial for several kinds of firms, including shops, cafes, factories as well as other product suppliers.

A gross profit margin of 50% may be deemed poor for some enterprises, such as banks, law firms, and other service organizations.

Practical Example

M & N beverage limited recorded sales income of $20 million in 2019, with a cost of goods sold of $11 million, which included fixed expenses, installation costs, and production costs. Specialists can effectively know M & N beverage's profit margin by using the equation below:

Gross profit margin = (total revenue – the cost of goods sold) / total revenue x 100

= ($20 million – $11million) / $20 million x 100 

= 45%

In Sentences

  • The gross profit margin seems to be an accounting statistic that is calculated by subtracting a firm's net sales from its cost of goods sold (COGS).
  • The gross profit margin is frequently stated as a percent of net sales.

 

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