## How to Calculate Gross Margin

GROSS MARGIN:

One final term you should understand is Gross Margin. Sales or revenues are subtracted from the cost of goods sold to arrive at the gross margin. MRS. BLUE's gross margin is \$150,000. Here's how it's calculated.

 REVENUE: Sales of blue jeans (5,000 jeans x \$50 each) \$250,000 Cost of Goods Sold (5,000 jeans x \$20 each) \$100,000 GROSS MARGIN \$150,000

The gross margin will always appear as a dollar amount on the income statement. Bankers and other investors look at the gross margin very closely because it tells them;

1.   How much a company makes from the products it sells.

2.   How much is available to contribute to the company's operating expenses.

Lets convert the dollar amounts into a percentage by dividing the cost of goods sold into the sales.

 Cost of goods sold = \$100,000 Sales of jeans \$250,000 = 0.40

The 0.40 has great significance. It tells a banker (and other investors) and Mary Parker that 40% of each one dollar sale (\$1.00) represents cost of goods sold. In other words, 60% of dollar sales will be available to contribute to the company's operating expenses. The 0.40 can also be viewed as a dollar amount. Furthermore, for every one dollar generated in sales, 40 cents goes to pay for the product, while the remaining 60 cents can be used to contribute to the company's operating expenses.

Categories: Financial