Gross Profits vs. Gross Margins
Gross profits and gross margins are often used synonymously in casual conversations about company profits and income statements. However, gross profits typically refer to the difference between sales and costs of goods sold in dollar amount, whereas gross margin more often recognizes profits as a percentage of sales.
Other People Are Reading
-
Gross Profit Basics
-
Gross profit or gross income equals the profit earned by a company without consideration of fixed costs. Total sales in a given period are calculated, and total costs of goods sold, or variable costs, are subtracted. Variable costs are the direct material and labor costs tied to product production or acquisition. Without the product, the variable cost does not exist. As a simple calculation, consider monthly revenue of $200,000 and variable costs of $125,000. This leaves $75,000 as the gross profit.
Gross Margin Basics
-
Gross profit ratio, gross profit margin and gross margin ratio are also terms used along with gross margin to express profit as a percentage. Gross margin is determined by dividing gross profit by revenue, and multiplying the result by 100. In the previous example, you would divide the $75,000 in gross profit by the $200,000 in revenue. This equals .375. Multiply that by 100 to create a percentage, making the gross margin for the month 37.5 percent.
-
Break-Even and Income
-
Managers often want to know the break-even point, which is the point at which a certain number of units or dollar amount of sales covers fixed expenses. Fixed expenses are costs you incur regardless of production output. If fixed costs are $50,000 per month, you must sell roughly $133,333.33 in products to break-even. This is computed by dividing $50,000 in costs by your expected gross margin of .375. If costs and margins remain constant, any revenue over $133,333.33 becomes profit. If your gross profit is $75,000 from the previous example and you subtract the $50,000 in fixed costs, your net income is $25,000.
Managerial Uses
-
Managers often have goals for gross margin. Industry standards or forecast models are often used to project anticipated margins. If 37.5 percent is expected and margins fall to 25 percent, managers will look to cut variable costs or drive up demand and sales price to improve margins. Gross profits are a reflection of sales price, costs and the sales volume generated during the period.
-
