Gross Margin Examples Help

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Gross margin is a very important concept of accounting world. Many students face problems in assignments related to gross margin. Don’t worry. We provide you a number of gross margin examples by which you can score more in your project works.
 

What is gross margin?

 
Gross margin is defined as excess of operating revenue over direct operating expenses divided by total revenue or in other words we can say that gross margin is the proportion of the difference between the total sales and cost price of the goods sold & total revenue of the business. Gross margin has special importance in preparation of final accounts of the proprietors. Gross margin is calculated with the help of trading a/c. Trading account reveals the gross profit by which gross margin is computed.
 
Gross margin has great importance because it reflects the profitability of a company before the overheads cost and illustrates the financial success of the company or the firm. In short, the gross margin is the difference between the total sales and the cost of goods sold divided by revenue, expressed as a percentage.
 

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Formula

 
The formula for gross margin ratio is
Gross margin ratio = revenue – cost of goods sold / revenue
Or
Gross margin ratio = gross profit/ revenue
For computation of gross margin, gross profit of the company should be compulsorily known. The formula for computing gross profit is given below
 
Gross profit = sales + cost of goods sold
Where, Cost of goods sold = operating cost – operating expenses
 

Examples of gross margin

 
EXAMPLE: XYZ Co. earned revenue of $800000 by selling goods of cost $600000 in the financial year 2013-14. Calculate the gross margin ratio of the company.
 
SOLUTION: gross margin ratio = $800000 – $600000 / $800000 = 0.25 or 25%
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