Lessons Learned: How to calculate Gross Margin
I seem to have to answer this question 1 or 2 times a month for newbies inside the business or for the same guy which throws away my email every time I give it to him, so I thought I would do a lessons learned on Margin.
Sometimes I’ve heard folks say contribution margin, but not right and NOT interchangeable. Here is the formula for determining Gross Margin:
Gross Margin = Revenue – Cost of Goods Sold – This formula produces gross margin dollars, but not a ratio or percent which is the generally accepted way to look at it as a % of revenue.
Gross Margin % = (revenue-costs of goods)/Revenue. (FYI – thats the excel formula too)
Costs of Goods Sold is often referred to as COGS and are the direct costs associated with delivery/production.
DON’T CONFUSE MARGIN WITH MARKUP! Here is a quick and dirty markup overview from Wikipedia:
The formula to convert a Markup to Gross Margin is:
Gross Margin (GM) = 100% – (100% /(100% + Markup))
Examples:
- Markup = 100%
- GM = 100% – ( 100% / 200% ) = 50%
- Markup = 66%
- GM = 100% – ( 100% / 166% ) = 39.8%
Technorati Tags: contribution margin, Gross Margin, Cost of Goods Sold, margin dollars, excel formula, COGS, Markup
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Comments
hi
i wanto to know which is the difference between this two formulas, both formulas show how to calculate the gross Margin
(revenue-cost of goods sold)/revenue
and
(revenue-cost of goods sold)/cost of goods sold
so markup if the incremental amount above the COGS. The first formula is the example of gross margin in $, the second is % and the third example provides insight into mark up being an attribute of how to determine margin. It always depends on what you are trying to solve for – GM$, GM% or mark up.
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