# Formula For Gross Profit Margin

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The formula for gross profit margin is given as the ratio of gross profit to the total revenue or net sales. The ratio is always expressed in percentage form. The gross profit can be calculated by subtracting direct expenses or the cost of goods sold from net revenue or net sales.

## What Is The Gross Profit Margin –

The gross profit margin ratio, also known as the gross margin ratio, is a profitability ratio that compares the gross margin of a company to its net sales or net revenue. Gross profit margin indicates the amount of revenue or sales remaining after subtracting the cost of goods sold (COGS). A company’s gross profit margin is the most basic measure of a company’s profitability. Gross profit margins vary widely by industry and by product type.

In simple words, Whatever money a company earns by selling its products or services is called sales or revenue. The amount of money cost for producing goods and services and paying workers is called as cost of goods sold (COGS). Now we can calculate the gross profit by subtracting COGS from Sales. Now to calculate gross profit margin, we can divide gross profit by sales or revenue and multiply it by 100 to convert it into a percentage.

## Formula For Gross Profit Margin –

The Formula For Gross Profit Margin,

Gross Profit Margin = (Net Sales – COGS) / Net Sales

## Calculation For Gross Profit Margin –

Let’s talk about the company ABC,

Sales of company ABC = 100

COGS of company ABC = 50

First we will calculate Gross Profit of company ABC,

Gross Profit of company ABC = Sales – COGS

Gross Profit of company ABC = 100 – 50

Gross Profit of company ABC = 50

Now we will calculate Gross Profit Margin,

Gross Profit Margin of company ABC = Gross Profit / Sales

Gross Profit Margin of company ABC = ( 50 / 100 ) * 100

Gross Profit Margin of company ABC = 50%

Now,

Let’s talk about the company XYZ,

Sales of company XYZ = 100

COGS of company XYZ = 70

First we will calculate Gross Profit of company XYZ,

Gross Profit of company XYZ = Sales – COGS

Gross Profit of company XYZ = 100 – 70

Gross Profit of company XYZ = 30

Now we will calculate Gross Profit Margin,

Gross Profit Margin of company XYZ = Gross Profit / Sales

Gross Profit Margin of company XYZ = ( 30 / 100 ) * 100

Gross Profit Margin of company XYZ = 30%

## Why Is The Gross Profit Margin Important –

1. It helps to assess a company’s financial health.
2. Wild fluctuations signal poor management and inferior products.
3. It helps to compare a company’s business model with that of its competitors.
4. High gross profit margins suggest that management is effective at generating revenue based on the labor and other costs involved in generating its products and services.
5. Decreasing gross profit margins can indicate a highly competitive market and product commoditization.
6. Purchasing raw materials at a low cost as a result of vertical integration of business.

## How To Improve Gross Profit Margin –

1. By raising the products or services prices.
2. By reducing labour costs.
3. By purchasing raw material at low costs.

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