How to Caculate Gross Profit Margin

Gross profit margin is the revenue remaining after the cost of goods are paid.

Gross profit margin is the amount of money remaining from sales after the cost of goods are paid. It is the margin of revenue left over to pay for the rest of the business operation, including wages, marketing, office supplies, rent and any other incidentals involved operating the business. Calculating gross profit margin is an easy process, provided that one has clarity in the cost of goods sold.

Things You'll Need

• Top Line Sales Data
• Cost of Goods

Instructions

Calculating Gross Profit Margin

1. Capture top-line sales data. Top line, also known as gross income or net sales, is the total revenue generated over a period of time. So named because it is typically the first item on an income statement, top-line sales include deductions due to returns and discounts, and is the money received for the goods and services sold. Top-line sales figures do not include the sales tax collected.

   Calculate top-line sales by multiplying the final selling price of goods by the final number of units sold. For example if 6,000 units sold at $10 each, and 3,000 units were sold at a discount for $4 each, and 1,000 units were refunded at $10 each, the top-line sales would be $62,000: (6,000 x $10) + (3,000 x $4) - (1000 x $10).

2. 

   Subtract the ending inventory from the beginning inventory, plus buys, to determine the cost of goods.

   Determine your cost of goods over a specific period of sales. Cost of goods is a computation involving goods purchased and the cost value of pre-existing inventory. Add the cost-dollar value of on-hand inventory at the beginning of the time period with the cost amount of new inventory purchased over the course of that time period. Then subtract the cost amount of inventory that remains at the end of the period and the difference is the cost of goods sold.

   For example, if inventory at the beginning of the month has a cost of $100,000 and $50,000 worth of inventory is purchased during the month, and inventory at the end of the month is $125,000, then the cost of goods sold over that period is $25,000.

   The cost of goods can vary greatly from business to business and even in the same industry due to variable selling demographics such as geography, size, competition, and demand.

3. Subtract the cost of goods from top-line sales to determine gross profit margin. For example, if monthly top-line sales total $62,000 and the cost of goods are $25,000 for that period, the gross profit margin is $37,000.

Tips & Warnings

• Often gross profit margin is calculated as a percentage of top-line sales. To calculate the gross profit margin percentage you divide the gross profit margin number by the top-line sales number. The gross profit margin percentage for the above example is 59.68% ($37,000/$62,000).

References

• "Investor Words": Gross Profit Definition
• "Investor Words": Top Line Definition
• "Virtual Advisor": Explaining Gross Profit on Net Sales

Resources

• Profit Plus: Cost of Goods Calculator