Calculating Gross Profit Margin

Sales less the cost of goods sold returns gross profit. The quality of operating and net profits depends on the gross profit margin.

How to Calculate the Gross Profit Margin

Calculated as (sales - cost of goods sold) ÷ (Sales x 100) gross margin is what regulates earnings before deducting running costs, investment and taxes.

Sales will include delivery or service charges made to clients, royalty and license or other fees. Cost of goods sold on the other hand can mean more than the purchase prices of finished goods.

Calculating Cost of Goods

All costs that are associated with getting merchandise for resale onto the shelves are charged to the gross profit.

Examples can be inbound shipping and delivery, goods in transit insurance, customs clearance and import duty. Overheads including labour and materials that are directly associated with manufacturing and added value such as repackaging are also part of the cost of goods. These will also include depreciation on equipment dedicated to such tasks.

Exceptional Profits and Gross Profit

Exceptional revenues such as investment income or profits arising form the disposal of fixed or tangible assets over and above their net book value are not included in gross and operating profit. These are only added to profit and loss once the operating profit has been calculated.

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