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Gross Margin

 
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The gross Margin is the most rudimentary financial metric that you can derive from the P&L. The calculation is performed like this:

Gross Margin = Revenue – COGS – Direct Production Cost

Gross Margin % = (Revenue – COGS – Direct Production Cost) / Revenue

Of course, the higher a gross margin the better, which would illustrate that the company is gaining good coverage on its sales when debiting the direct cost of sales from its revenue.

Whether or not this coverage is sufficient to cover the remaining indirect costs is still to be analyzed. Indirect costs could include:

  • Wages for administrative staff

  • Rent for buildings

  • Energy consumption

  • Business travels

  • Depreciation of machinery and other assets

  • Work cloths

  • Etc.

The result after debiting the indirect costs from the P&L can be analyzed using the net margin before finances and taxes.




 
 
 
 
Date Created: 2014-08-05
Posted by: Admin
 
 
Gross Margin
 

Related resources:

Return on Investment (ROI)
Return on Assets (ROA)
Return on Equity (ROE)
Return on Capital Employed (ROCE)
Contribution Margin and Contribution Margin Ratio
Reference(s)
 
Keywords:

MSC, MBA, GROSS MARGIN, DIRECT COSTS, VARIABLE COSTS

 






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