What is gross margin?

What is gross margin?
Gross margin is same as gross profit ratio. That is, it is the ratio of gross profit to sales.

Gross margin or gross profit margin is the difference between the sales and the production costs of the company after excluding overhead, payroll, taxation, and interest payments. It expresses the relationship between gross profit and sales revenue. It is a measure of how well each rupee of a company's revenue is utilized to cover the costs of goods sold.

Higher gross margins for a manufacturer reflect greater efficiency in turning raw materials into income.

Most company's work towards attaining a particular gross profit margin or bettering it. So in many cases, the selling price of the finished goods is determined based on the margin that the company wishes to attain by selling these goods.

Example: Let us say Mr.X manufactures leather belts and sells them to retail show-rooms. The cost that Mr.X incurs during the production of a single premium quality belt is Rs. 400/- He wishes to maintain a profit margin of 25% on his products. So the price he would sell his belts to his retailers is Rs. 500/-

Formula:

1. Gross Profit / Net Sales or
2. (Net Sales - COGS) / Net Sales