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Gross Margin is an Ambiguous Phrase That Expresses the Relationship Between Gross Profit and Sales Revenue

Gross Margin is an Ambiguous Phrase That Expresses the Relationship Between Gross Profit and Sales Revenue

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Published by: kishorepatil8887 on Mar 31, 2010
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05/12/2014

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Gross margin
is an ambiguous phrase that expresses the relationship betweengross profitandsalesrevenue. The ambiguity arises because it can be expressed in absolute terms:Or as the ratio of gross profit to sales revenue, usually in the form of a percentage:In everyday speech the word 'percentage' is sometimes omitted and this can create confusion. Note: "Cost of goods sold" are the costs directly linked to the product, variable costs, e.g. costsfor material and labor. They do not include fixed costs like office expenses, rent, administrativecosts, etc.Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials intoincome. 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 tinymargins.
Contents
[hide]
y
 
1
How to use Gross Margin in Sales 
y
 
2
Markup 
y
 
3
Gross Margin 
y
 
4
Converting between Gross Margin (GM) and Markup 
y
 
5
Using Gross Margin to calculate your selling price 
o
 
5
.
1
Formula to calculate Selling price using Gross Margin 
[
edit] How to use Gross Margin in Sales
Sales people often need to determine how much to charge a customer by marking up the cost of a product to arrive at the final price. There are two basic methods but both give the same result - anindication of the gross profit of the sale. The two methods express the result differently.
[
edit] Markup
 
Markupcan be expressed either as a decimal or as a percentage, but is used as a multiplier. Hereis an example: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 
1
.
5
or 
50%
. To calculate the price to thecustomer, you simply take the product cost of $
100
and multiply it by the markup arriving at theselling price of $
150
.While we understand that we made a $
50
profit on the example above, markup does not tell usdirectly what percentage of our selling price is profit. If someone told you that they just sold a product for $
339
at a
1
.66 markup it is hard to directly understand exactly how many dollars of  profit was realized on the sale.
[
edit] Gross Margin
Most people find it easier to work with Gross Margin because it directly tells you how many oyour 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 priceis profit, or $
50
.In the more complex example of $
339
, a markup of 66
%
represents approximately a
40%
grossmargin. 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.
[
edit] Converting between Gross Margin (GM) and Markup
The formula to convert a Markup to Gross Margin is:
Gross Margin (GM) = 100% - (100% /(100% + Markup))
 Examples:
y
 
Markup =
100%
 
y
 
GM =
100%
- (
100%
/
200%
) =
50%
 
y
 
Markup = 66
%
 
y
 
GM =
100%
- (
100%
/
1
66
%
) =
39
.8
%
 
[
edit] Using Gross Margin to calculate your selling price

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