Gross Margin Formula

What is Gross Margin Formula?

Gross margin is derived by the deducing Cost of Goods Sold (COGS) from the Net Revenue or Net Sales (Gross Sale reduced by discounts, returns, and price adjustments), and when the result is divided by revenue, we can arrive at the gross profit percentage. The formula of gross margin in numbers and percentage term is as follows:

Gross Margin Formula (In Absolute Term) = Net Sales – COGS
 
Gross Margin Formula ( In Percentage Form) = (Net Sales – COGS) * 100 / Net Sales
Gross-Margin-Formula

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For eg:
Source: Gross Margin Formula (wallstreetmojo.com)

Explanation

Net Sales = Gross Sales – ( Refunds + Price Adjustments + Price Deductions )
COGS = Opening Inventory + Purchases – Closing Inventor

Steps to Calculate Gross Margin

The calculation of the gross margin equation can be done by using the following steps:

  1. Firstly, we would calculate the net sales by deducting returns, discounts, and other adjustments in the sales amount.

  2. Then, Cost Of Goods SoldCost Of Goods SoldThe cost of goods sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company.read more (COGS) would be derived by adding all the purchases, direct cost (labor and material), Opening Inventory, and by subtracting the Closing Inventory.

  3. Now, we could calculate the Gross Margin by reducing COGS from Net Sales.

  4. Also, to arrive at the Gross Margin Percentage, we need to divide the Gross Margin (calculated above) from the Net Sales.

Examples of Gross Margin Formula(with Excel Template)

Let’s see some simple to advanced examples of the gross margin equation to understand it better.

You can download this Gross Margin Formula Excel Template here – Gross Margin Formula Excel Template

Gross Margin Formula Example #1

Let’s take the example of Apple Inc. as on September 28, 2019. The company has sold products and services worth $213,833 million and $46,291 million, respectively. The cost of goods sold includes the Cost allocated to products and services amounting to $144,996 million and $16786 million each. Find out the Gross Margin and Gross Margin percentage.

Solution:

Use the below-given data for the calculation of gross margin.

Gross Margin Formula Example 1

Calculation of Gross margin can be done as follows:

Example 1.1

Gross Margin = $260174 – $161782

The gross margin will be –

Gross Margin Formula Example 1.2

Gross Margin = $98,392

Calculation of Gross margin % can be done as follows:

Example 1.3

Gross Margin (%) = ($260174 – $161782 ) * 100% / $260174

Gross Margin (%) will be –

Gross Margin Formula Example 1.4

Gross Margin (%) = 38%

Explanation 

The gross margin equation expresses the percentage of gross profitPercentage Of Gross ProfitGross profit percentage is used by the management, investors, and financial analysts to know the economic health and profitability of the company after accounting for the cost of sales. Gross profit percentage formula = Gross profit / Total sales * 100% read more; the company is earning from $1 of sales. In the above case, Apple Inc. has arrived at a gross margin of $ 98,392, and 38% as in percentage form. This 38% of gross margin indicates that out of 1$ of revenue from the net sales, Apple Inc. is able to make a gross profit of 0.38 cents.

Gross Margin Formula Example #2

Let’s also take one more example. We have data from Microsoft Inc. For the year ended June 30, Microsoft had a Revenue from products and services and another dept. of $ 66,069 million and $59,774 million, respectively. Also, In the same period, The Cost of RevenueCost Of RevenueThe cost of revenue is the total expense incurred from manufacturing to delivering a product or service to the customer. It reflects all direct costs associated with the product or service delivered and is reflected in a company's income statements.read more for Product and Service and another dept. is $16273 million and $26,637 million, respectively. We will try to calculate Gross Profit MarginGross Profit MarginGross Profit Margin is the ratio that calculates the profitability of the company after deducting the direct cost of goods sold from the revenue and is expressed as a percentage of sales. It doesn’t include any other expenses into account except the cost of goods sold.read more from the above-mentioned data.

Solution:

Use the below-given data for the calculation of gross margin.

Example 2

Calculation of gross margin in excel can be done as follows:

Gross Margin Formula Example 2.1

Gross Margin = $125843 – $42910

Gross Margin will be –

Example 2.2

Gross Margin = $ 82,933.

Calculation of gross margin (%) can be done as follows:

Gross Margin Formula Example 2.3

Gross Margin (%) = ($125843 – $42910) * 100 % / $125843

Gross Margin (%) will be –

Example 2.4

Gross Margin (%) = 66%

Explanation

As we can see, Microsoft has clocked the Gross margin to the tune of $ 82,933 million and 66% in terms of percentage. As Microsoft Inc. and Apple Inc. are in similar fields, we would be able to compare these companies. In the absolute term, Apple Inc. has a Gross Margin of $ 98,392 million, whereas Microsoft has earned only $ 82933 million. But, when it comes to the percentage figures, Microsoft Inc. has a superior margin at 66% in comparison to 38% of Apple Inc.

Relevance and Uses of Gross Margin Formula

Gross margin plays an important role in the evaluation of the company for various purposes. Few noted ones are mentioned below:

This article has been a guide to gross margin formula. Here we discuss the calculation of gross margin and its percentage (%) using formula along with examples and a downloadable excel template. You can learn more about financial analysis from the following articles –

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