How to Calculate Gross Profit Margin

Gross profit margin can be calculated by dividing gross profit of the business by total sales revenue generated. The ratio is expressed as percentage and is as follows:

Gross Profit Margin = (Gross profit / Sales) * 100%

Learn how to calculate Gross Profit Margin with the following example:

James Ltd has the following data for the year ended 31 December 2010:
Sales revenue $870,000
Returns inwards $70,000
Purchases $200,000
Returns outwards $60,000
Carriage inwards $20,000
Carriage outwards $38,000
Opening inventory $100,000
Closing inventory $80,000

Then,
Net sales = Sales revenue - Returns inwards  = 870,000 - 70,000 = $800,000
Net purchases = Total Purchases - Returns outwards = 200,000 - 60,000 = $140,000
Cost of Sales = Opening inventory + Net purchases + Carriage inwards - Closing inventory =  100,000 + 140,000 + 20,000 - 80,000 = $180,000
(Note: Carriage Inwards is added to Purchases to get the cost of sales whereas Carriage Outwards is treated as a normal expense in the Income Statement)
Gross profit = Net sales - Cost of sales = 800,000 - 180,000 = $620,000
Gross Profit Margin = (620,000 / 800,000) * 100% = 77.5%

* Next: How to Calculate Net Profit Margin
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