How to Calculate Gross Profit Margin Percentage

So, you want to be a financial analyst at a multinational corporation?

Maybe not, but since you want to know how to calculate gross profit margin percentage, we’ll assume that you are at least working in finance department at a small scale company, or running your own business.

Before we jump to steps to calculating gross profit margin percentage, a quick summary of what gross profit is and why it is important to companies and investors, will help you better understand these seemingly intimidating financial figures. Learning these figure is pretty easy, but you should be aware that gross profit is one of the most important factors that depict the financial strength of a company.

Gross profit is revenue less costs of goods sold/cost of service. Revenue is total sales in a given period, while “cost of goods sold” is the total money you paid to purchase the products or goods from your vendor. Keep in mind that expenses like transportation used to buy goods and workers employed to prepare them will not be included in “cost of goods sold.”

To help you get the clear picture of gross profit margin, we will use a fictitious company — ABC Computers — that sells computers and electronic gadgets. Assume that the ABC Computers purchased 10 computers from wholesale market at the rate of $50 each in the month of January. The company then sold those 10 computers in the same month at the rate of $100 each.

Total revenue for the month of January, that the company generated, was $1000 ($100×10). Revenue is calculated by multiplying per unit selling price by total number of units sold. Here units mean computers. On the other hand, total cost of goods sold was $500 ($50×10). Determine cost of goods sold by multiplying per unit cost of each computer by the number of computers purchased.

– Revenues                     $1000

– Cost of goods sold     $500

Instructions

  • 1

    Calculate gross profit

    Subtract total cost of goods sold from total revenues. According to our example, $1000 - $500 = $500. We have a gross profit of $500 for the month of January.

  • 2

    Determine gross profit margin

    Gross profit margin is calculated by dividing total gross profit by total revenue. In this example, $500/$1000 = 0.5. This figure is important as it tells you for every dollar the ABC Computers earns on each unit, it has 0.5  as gross profit.

  • 3

    Calculate gross profit margin percentage

    Multiply the gross profit margin number by 100. In our example, $0.5x100 = 50%.

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