Lessons Learned: How to calculate Gross Margin
I seem to have to answer this question 1 or 2 times a month for newbies inside the business or for the same guy which throws away my email every time I give it to him, so I thought I would do a lessons learned on Margin.
Sometimes I’ve heard folks say [tag]contribution margin[/tag], but not right and NOT interchangeable. Here is the formula for determining [tag]Gross Margin[/tag]:
Gross Margin = Revenue - [tag]Cost of Goods Sold[/tag] - This formula produces gross [tag]margin dollars[/tag], but not a ratio or percent which is the generally accepted way to look at it as a % of revenue.
Gross Margin % = (revenue-costs of goods)/Revenue. (FYI - thats the [tag]excel formula[/tag] too)
Costs of Goods Sold is often referred to as [tag]COGS[/tag] and are the direct costs associated with delivery/production.
DON’T CONFUSE MARGIN WITH MARKUP! Here is a quick and dirty markup overview from Wikipedia:
The formula to convert a Markup to Gross Margin is:
Gross Margin (GM) = 100% - (100% /(100% + [tag]Markup[/tag]))
Examples:
- Markup = 100%
- GM = 100% - ( 100% / 200% ) = 50%
- Markup = 66%
- GM = 100% - ( 100% / 166% ) = 39.8%
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