How gross margin is worked out
Gross profit is revenue minus the cost of goods sold. Gross margin divides that profit by revenue and shows it as a percent. To go the other way, divide the cost by one minus the margin you want.
Gross margin % = (revenue − COGS) ÷ revenue × 100 Price = cost ÷ (1 − margin ÷ 100)
COGS is cost of goods sold. Nothing is rounded until the result is shown.
Example: gross margin from revenue and cost
Revenue $80,000.00, cost of goods sold $52,000.00.
- Gross profit: $80,000.00 − $52,000.00 = $28,000.00
- Gross margin: $28,000.00 ÷ $80,000.00 × 100 = 35%
Example: price for a target margin
A unit costs $40.00 and you want a 30% gross margin.
- Price: $40.00 ÷ (1 − 30 ÷ 100) = $40.00 ÷ 0.70 = $57.14
- Profit per unit: $57.14 − $40.00 = $17.14, which is 30% of the price.
Taking 30% on top of the cost would give $52.00, a margin of only 23.08%. That is the difference between markup and margin.
Questions
What is gross margin?
Gross profit as a share of revenue. Gross profit is revenue minus the cost of goods sold, so gross margin shows how much of each sales dollar is left before operating expenses, interest and tax.
What goes into cost of goods sold?
For a business that holds stock, the IRS lays it out as beginning inventory, plus purchases, minus ending inventory [1]. Other costs, such as direct labor, may belong too; your accountant or tax rules decide which.
Is gross margin the same as markup?
No. Margin divides profit by the price; markup divides it by the cost. The same sale gives a smaller margin than markup. See the margin vs markup calculator.
What is a good gross margin?
This page does not give one. Margins differ widely between businesses and no single figure applies to all of them. Compare against your own past periods and your own costs.
Why can a target margin not reach 100%?
Price = cost ÷ (1 − margin). At 100% the divisor is zero, so no price works unless the cost is zero.