Gross Margin Calculator
Calculate profit margins and markups instantly
Understanding Gross Margin
Gross margin is a critical financial metric that represents the percentage of total sales revenue that a company retains after incurring the direct costs associated with producing the goods and services sold by the company. It essentially measures how efficiently a company uses its resources to produce its core products.
How is Gross Margin Calculated?
The formula for Gross Margin is straightforward but powerful. To find the margin, you first subtract the Cost of Goods Sold (COGS) from your Total Revenue to find the Gross Profit. You then divide that Gross Profit by the Total Revenue.
Gross Margin (%) = ((Revenue – COGS) / Revenue) * 100
Margin vs. Markup
While often used interchangeably, margin and markup are different:
- Gross Margin is the profit as a percentage of the selling price.
- Markup is the amount added to the cost price of goods to cover overheads and profit, expressed as a percentage of the cost.
Real-World Example
Imagine you run a boutique coffee shop. You sell a specialized blend for $25.00 (Revenue). The cost of the coffee beans, the cup, and the milk totals $10.00 (COGS).
- Gross Profit: $25.00 – $10.00 = $15.00
- Gross Margin: ($15.00 / $25.00) * 100 = 60%
- Markup: ($15.00 / $10.00) * 100 = 150%
This means for every dollar of sales, you keep $0.60 to pay for fixed expenses like rent, salaries, and marketing.