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Gross Margin Formula:
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Gross Margin measures gross profit as a percentage of revenue after deducting cost of goods sold. It indicates how efficiently a company is producing and selling its products.
The calculator uses the Gross Margin formula:
Where:
Explanation: The formula calculates the percentage of revenue that exceeds the cost of goods sold, showing the profitability of core business operations.
Details: Gross Margin is a key profitability metric that helps businesses understand their production efficiency, pricing strategy effectiveness, and overall financial health. It's essential for comparing performance across periods and against industry benchmarks.
Tips: Enter revenue and cost of goods sold in the same currency units. Both values must be positive, with revenue greater than zero for valid calculation.
Q1: What is considered a good gross margin?
A: Good gross margins vary by industry, but generally 15-20% is acceptable, 20-40% is good, and above 40% is excellent. Compare with industry averages for accurate assessment.
Q2: How does gross margin differ from net margin?
A: Gross margin only considers cost of goods sold, while net margin includes all operating expenses, taxes, and interest, providing a complete picture of profitability.
Q3: Can gross margin be negative?
A: Yes, if cost of goods sold exceeds revenue, indicating the company is selling products at a loss before considering other expenses.
Q4: What factors affect gross margin?
A: Production efficiency, material costs, labor costs, pricing strategy, inventory management, and economies of scale all impact gross margin.
Q5: How often should gross margin be calculated?
A: Most businesses calculate gross margin monthly as part of regular financial reporting, with quarterly and annual reviews for trend analysis.