What is the gross margin

Gross margin

The gross margin shows sales in relation to the cost of goods and materials. If the gross margin is given as an absolute value, it shows the company's gross profit. The key figure informs the entrepreneur how much sales are left after deducting the manufacturing costs in order to cover the other costs - e.g. B. Personnel and Marketing - to cover. Alternatively, the gross margin can be specified in percent.

In this lesson you will learn about the gross margin. You will find out how the gross margin is calculated and the difference to the net margin. Finally, you will be informed about the limits of the gross margin. To deepen your knowledge, you can answer the exercise questions after the text.

  • Synonyms:Gross profit | Gross profit | Gross income
  • English:big profit | large margin

Why is the gross margin important?

In the To determine the annual surplus, the gross margin is a subtotal If the entrepreneur knows the key figure for the year in question, he knows how much money he has left to cover the costs that are not related to the goods and the material.

This turnover covers the expenses for personnel, advertising and other costs. After deducting all costs, the profit remains.

Formula: calculate gross margin

The gross margin is determined according to the following scheme:

Calculate gross margin:

   

Calculate gross profit on sales:

   

Example: Calculate the gross margin
“Example GmbH” has sales of € 100,000. The costs incurred for goods and materials totaled € 60,000.

The gross profit on sales is determined as follows:

   

The following step is necessary to determine the gross margin:

   

   

Delimitation to the net margin

Both key figures form subtotals in order to determine the annual result of a company. The gross margin is two levels ahead of the net margin. If the entrepreneur includes non-product-related costs such as taxes and interest in the result, he receives the net margin.

Where does the gross margin have its limits?

Material costs can be divided into the following two groups:

When determining the gross margin will be not all material costs included:

  • Only the individual costs play a role.
  • The overhead costs are left out.

For the entrepreneur it is not possible to see from the gross margin how effectively the marketing department or the administration are working. Another negative aspect is that only company-internal factors are taken into account. How price increases from suppliers affect the company result cannot be read from the gross margin.

Practice questions