We can find gross margin or gross profit margin on the income statement of every company and every company need to prepare it in every year. Gross margin or gross profit margin plays an important role in the firm’s revenue, expenses and profit.
Gross margin is the income earned by a company after paying all the goods cost. As such, gross margin defines the limits of every business person must take into account when preparing a budget.
How to do the calculation of Gross margin percentage & margin formula :
Gross profit
1.Gross profit percentage = ——————- x 100
Sales
Gross profit = Sales – Cost of goods sold
Cost of goods sold = Opening stock + Purchase + Manufacturing expenses – Closing stock
Gross Profit
2. Gross Margin percentage = —————– x 100
Revenue
Gross Profit = Revenue – Cost of goods sold
Calculation of Gross margin percentage with examples :
Example-1
The following of the particulars of Income of a Ramu & Co Ltd company for the year ended. We are preparing gross profit margin percentage
| Particulars | Amount |
| Sales | 10,00,000 |
| Purchases | 7,00,000 |
| Opening Stock | 1,10,0000 |
| Closing Stock | 1,30,000 |
| Sales Returns | 50,000 |
Now here calculation of gross profit percentage :
Gross profit
Gross profit profit % = —————– x 100
Sales
Calculation of gross profit = Net Sales – Cost of goods sold
Net sales = Sales – Sales Returns
= 10,00,000 – 50,000 = 9,50,000
Cost of goods sold = Opening stock + Purchase – Closing stock
= 1,10,0000 + 7,00,000 – 1,30,000 = 6,80,000
Gross profit = 9,50,000 – 6,80,000
= 2,70,000
2,70,000
Calculation of gross profit percentage = —————– x 100
9,50,000
= 28.42 %
Example -2
Here is an example of how to calculate gross profit and the gross profit margin, using Advik Honda Show Room
| Revenue | Amount |
| Honda Bikes | 15,00,000 |
| Financial Services | 2,50,000 |
| Other Services | 50,000 |
| Total Revenue | 18,00,000 |
| Expenses | Amount |
| Honda Bikes cost of sales | 12,00,000 |
| Administrative expenses | 35,500 |
| Total cost of expenses | 12,35,000 |
Now we calculate gross margin percentage using the above information. First, we calculate gross profit and cost of goods sold (Note: When we calculate the cost of goods sold we are not considered selling and administrative expenses why because they are indirect expenses)
Gross profit
Gross margin percentage = ——————- x 100
Revenue
Gross profit = Revenue – Cost of goods sold
= 18,00,000 – 12,00,000
= 6,00,000
6,00,000
Gross margin percentage = ——————- x 100
18,00,000
= 33.33%