What is a Gross Margin?
For a business the gross margin is the difference between the revenue and the variable costs.
It is sometimes referred to as gross profit margin, and represents the true income of a business as it shows the income left after deducting variable costs which is available to pay the operating expenses of the business.
For a product, the gross profit margin is the selling price of the product less the cost of the product. The term is often used by retailers and the retail gross profit margin would be defined as:
So for example, if a product is purchased for 30 and retailed for 90, then the gross profit on that product is 90 – 30 = 60. This can then be used in the gross margin rate formula to give a gross profit percentage of 60 / 90 = 67%
For further information on the meaning of this term see the Wikipedia definition.
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About the Author
Chartered accountant Michael Brown is the founder and CEO of Double Entry Bookkeeping. He has worked as an accountant and consultant for more than 25 years in all types of industries. He has been the CFO or controller of both small and medium sized companies and has run small businesses of his own. He has been a manager and an auditor with Deloitte, a big 4 accountancy firm, and holds a BSc from Loughborough University.