About Gross Profit Margin

What is Gross Profit Margin?

Gross Profit Margin is a financial metric that measures the profitability of a company by calculating the percentage of revenue that exceeds the cost of goods sold (COGS). It represents the proportion of each dollar of revenue that the company retains as gross profit.

Formula for Gross Profit Margin

The formula to calculate Gross Profit Margin is:

\[\\text{Gross Profit Margin} = \\frac{\\text{Gross Profit}}{\\text{Revenue}} \\times 100\%\]

Where:

• Gross Profit = Revenue - Cost of Goods Sold (COGS)
• Revenue is the total amount of income from sales
• COGS is the direct costs associated with producing the goods sold by a company

Calculation Steps

1. Calculate the Gross Profit by subtracting COGS from Revenue.
2. Divide the Gross Profit by Revenue.
3. Multiply the result by 100 to express it as a percentage.

Example

Let's calculate the Gross Profit Margin for a company with the following financial data:

• Revenue: $100,000
• Cost of Goods Sold (COGS): $60,000

1. Gross Profit = $100,000 - $60,000 = $40,000
2. Gross Profit Margin = ($40,000 / $100,000) × 100% = 40%

Visual representation:

Therefore, the Gross Profit Margin for this company is 40%, meaning the company retains 40% of its revenue as gross profit after accounting for the cost of goods sold.