How to Calculate Gross Profit Margin Ratio
Gross profit margin measures the percentage of sales revenue that is not used to pay the cost of producing the goods being sold. For example, a gross profit margin ratio of 30 percent means 30 cents of every dollar of sales is retained by the company, once the company accounts for its costs of manufacturing the product. The gross profit margin should not be confused with the net profit margin, which takes into consideration all costs incurred by the company, such as taxes.
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Instructions
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Calculate the cost of the goods you sold. Only include the cost of materials and labor needed to make the goods. Do not include the costs of inventing the goods or any interest your company pays on loans.
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Subtract the company's cost of goods sold from its revenues. For example, if your company had $4 million in revenues and $2.5 million in costs of goods sold, you would subtract $2.5 million from $4 million. The net result is $1.5 million.
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Determine the difference between revenues and costs of good sold. Divide the difference by the cost of goods sold to find the gross profit margin, shown as a decimal. In the above example, divide $1.5 million by $4 million to get 0.375.
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Determine the gross profit margin expressed as a percentage. To do this, multiply the gross profit margin ratio by 100. In the above example, multiply 0.375 by 100 to get 37.5 percent.
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References
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