Gross Margin Formula

Reviewed byDheeraj Vaidya, CFA, FRM

What is Gross Margin Formula?

The gross margin derives by deducting the cost of goods sold (COGS) from the net revenue or net sales (gross sales reduced by discounts, returns, and price adjustments). When the result is divided by revenue, we can determine the gross profit percentage. In simple terms, it is the amount of money a company has with them after deducting all of their direct production costs.


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Using a gross margin formula calculator helps an organization to understand their production costs and basic financial health derived through their core activities in percentage format. A high gross margin indicates that the company might be able to retain more capital. It is also often referred to as gross profit margin.

Key Takeaways

  • The gross margin is obtained by writing off the cost of goods sold (COGS) from the net revenue or net sales (gross sales reduced by discounts, returns, and price adjustments). 
  • It is an essential barometer of the entity’s ability to profit from core operations. The gross profit margin only includes operating revenue and expenses. Therefore, the company’s fundamental strength is observed by this ratio.
  • It is the operating revenue and expenses. These two heads are essential to the business and aid the management in managing the production and sales division’s production performance.

Gross Margin Formula Explained

Gross margin is the percentage of profits an organization is able to retain after all deducting all direct expenses relating to production. To understand the sales gross margin formula, it is important to understand a few other concepts around it such as gross sales, cost of goods sold, and net sales. Let us discuss them in detail through the discussion below.

Net Sales = Gross Sales – (Refunds + Price Adjustments + Price Deductions)

COGS = Opening Inventory + Purchases – Closing Inventory

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The calculation of gross margin can be calculated both un absolute terms or in percentage format.

The formula of gross margin formula calculator in numbers and percentage terms can be calculated through the below formulae: –

Gross Margin Formula (In Absolute Term) = Net Sales – COGS

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

How To Calculate?

One can do the calculation of the gross margin equation 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, the 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 derive by adding all the purchases, direct cost (labor and material), opening inventory, and subtracting the closing inventory.
  3. Now, we could calculate the gross margin by reducing COGS from net sales.
  4. To arrive at the gross margin percentage, we need to divide the gross margin (calculated above) by the net sales.


Let us discuss some simple to advanced models of the sales gross margin formula to understand the concept better.

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

Example #1

As of September 28, 2019, Apple Inc. has sold products and services worth $213,833 million and $46,291 million. The cost of goods sold includes the price allocated to products and services amounting to $144,996 million and $16,786 million each. Now, let us find out the gross margin and gross margin percentage.


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

The gross margin (%) will be: –

Gross Margin Formula Example 1.4

Gross Margin (%) = 38%

 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 earns from $1 of sales. In the above case, Apple Inc. has reached a gross margin of $98,392 and 38% in percentage form. This 38% gross margin indicates that out of $1 of revenue from net sales, Apple Inc. can make a gross profit of 0.38 cents.

Example #2

For the year ended June 30, Microsoft Inc. had revenue from products and services and another department of $66,069 million and $59,774 million, respectively. Also, in the same period, the cost of revenue Cost 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 more for products and services and another dept. is $16273 million and $26,637 million, respectively. Therefore, we will try calculating the 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 more from the data above.


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%

As we can see, Microsoft Inc. has clocked the gross margin to $82,933 million and 66% in percentage. As Microsoft Inc. and Apple Inc. are in similar fields, we would be able to compare these companies. Apple Inc. has a gross margin of $98,392 million. At the same time, Microsoft Inc. has earned only $82,933 million in the absolute term. But, regarding the percentage figures, Microsoft Inc. has a superior margin at 66% compared to 38% of Apple Inc.


The gross margin formula calculator is important in evaluating the company for various purposes. A few of the most significant ones are as discussed below:

Frequently Asked Questions (FAQs)

Can the gross margin be more significant than 100?

Margins may always be mostly 100 percent, but markups can be 200 percent, 500 percent, or 10,000 percent, based on the price and the offer’s total cost. The higher the price and the lower the cost, the higher the markup.

How to add the gross margin formula in Excel?

A gross margin is calculated as a percentage using the formula gross margin = (total revenue – cost of goods sold)/full payment x 100. It displays the company’s earnings after covering all direct costs of producing a good or service.

What is the gross margin formula vs. gross profit?

Gross margin is calculated by dividing gross profit by sales revenue and multiplying the result by 100. In contrast, gross profit is determined by deducting the cost of goods sold (COGS) from the sales income.

 How does gross margin differ from net margin? 

Gross margin measures the profitability of a company’s core operations, focusing only on the direct costs associated with producing goods or services. Net margin, on the other hand, represents a company’s overall profitability after deducting all expenses, including operating expenses, taxes, interest, and other non-operating items.

This article is a guide to Gross Margin Formula and what is it. Here, we discuss how to calculate it, examples, and importance. You can learn more about financial analysis from the following articles: –

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