When analyzing corporate profits and losses, the consolidated gross margin indicates the rate of profit per product or service sold. To calculate the consolidated gross margin, you must have a number of pieces of information about a company's operating costs. When expressed, the consolidated gross margin takes the form of a percentage of the company's sales.
Calculating Gross Margin Rate
When determining the gross margin rate, you need to know the cost of sales and the retail price of the item. In other words, the gross margin refers to a product or service's markup. This amount of markup is the ultimate profit that the company sees from the specific item. To arrive at this number, you subtract the cost of sales from the ultimate retail price. The resulting number, when expressed as a percentage, is the gross margin rate.
Consolidating Gross Margin Rate
To arrive at a consolidated gross-margin rate, a company simply combines all of the percentages of each of its products and services to arrive at one overall consolidated gross-margin rate. Companies and analysts use this percentage as one indication of where the company stands in terms of its operating expenses relative to its established retail prices. There are a number of different factors that affect these numbers, and thus the resulting consolidated gross-margin rate.
Factors That Cause Gross Margin Change
The specific factors that affect gross margin depend on the types of products that a company manufactures and sells and the extent of the company's involvement in the production line. These factors include the cost of raw materials, shipping costs and market trends in consumer behavior. For example, global fluctuations in the price of oil can have a major impact on a company's operating costs, as oil prices affect the company's overall shipping costs.
Gross Margin Change and Markdowns
Markups and markdowns don't have the same overall effect on gross margin change. Although markup is the price difference between the cost of production and the final retail price, markdown is any reduction in the retail price. Markdowns can happen for any number of reasons, but they typically involve consumer behavior, not operating costs. Operating costs, on the other hand, do greatly impact markups.
- "Gross Margin: 26 Factors Affecting Your Bottom Line"; Bill Lee; 2002
- "International Financial Statement Analysis Workbook"; Thomas R. Robinson, et al.; 2008