Calculating Gross Profit Margin

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The Gross Profit Margin is a ratio of the amount of money left over after paying for all of the costs. It determines profitability.

To find the Gross Profit Margin, you need to know several figures from the company. First, Net Sales. That figure comes from its total sales minus returns and discounts. Next, you need to know Cost of Goods Sold. That figure includes the cost of producing the good or service: material, labor, and other expenses. Please do not include any indirect costs like distribution.

The formula is

Gross Profit Margin = (Net Sales - Cost of Goods Sold) ÷ Net Sales.


For example A company profits $2500 selling goods that cost $1000 to make. Its gross profit margin is

Solving the equation gives us a Gross Profit Margin of 60%. That means that 60% of the revenue goes into making its products so the other 40% can be used for various other expenses. Another way to think of it is for every dollar made by the company, 60 cents goes towards the production and the 40 cents left over from that dollar goes to operating costs and profit.  The lower the Gross Profit Margin percent is, the more profit that you will get to take home with you.