gross margin

Examples of gross margin in the following topics:

• Profit Margin

  • Profit margin measures the amount of profit a company earns from its sales and is calculated by dividing profit (gross or net) by sales.
  • Since there are two types of profit (gross and net), there are two types of profit margin calculations.
  • Net profit is the gross profit minus all other expenses.
  • The gross profit margin calculation uses gross profit and the net profit margin calculation uses net profit .
  • The difference between the two is that the gross profit margin shows the relationship between revenue and COGS, while the net profit margin shows the percentage of the money spent by customers that is turned into profit.

• Ratio Analysis and EPS

  • Gross margin, Gross profit margin or Gross Profit Rate: Gross profit / Net sales
  • Profit margin, net margin or net profit margin: Net profit / Net sales

• Overview of Merchandising Operations

• Uses of the Income Statement

  • An optimally efficient organization will have higher margins in the following areas:
  • Profit margin: A higher net profit as a proportion of sales indicates an overall higher capacity to capture returns on revenue.
  • Operating Margin: Another useful indicator of profitability is operating income over net sales.
  • Comparing this to the overall profit margin can give useful indications of reliance on debt.
  • Another useful indicator is the gross margin.

• Sales Forecast Input

  • Target volume, price, and contribution margin per unit are the key inputs to a sales forecast.
  • Gross sales are the sum of all sales during a time period.
  • Net sales are gross sales minus sales returns, sales allowances, and sales discounts.
  • Gross sales do not normally appear on an income statement.
  • Target Revenue = 100 * [ { Fixed Costs + Target Profits } / Contribution Margin ]

• Tax Deductions

  • A company's marginal tax rate is 35%.
  • This can be considered an expense or simply a reduction in gross income, which is the starting point for determining Federal and state income tax.
  • The marginal tax rate is dependent upon a jurisdiction's tax structure, usually referred to as tax brackets.
  • For example, a tax credit of $1,000 reduced taxes owed by $1,000, regardless of the marginal tax rate.
  • This graph plots the marginal income tax rates for the top tax bracket in the US from 1913 to 2009.

• Total Assets Turnover Ratio

  • Companies with low profit margins tend to have high asset turnover, while those with high profit margins have low asset turnover.
  • In financial ratios that use income statement sales values, "sales" refers to net sales, not gross sales.

• Operating Margin

  • The operating margin (also called the operating profit margin or return on sales) is a ratio that shines a light on how much money a company is actually making in profit.
  • For example, an operating margin of 0.5 means that for every dollar the company takes in revenue, it earns $0.50 in profit.
  • However, the operating margin is not a perfect measurement.
  • Furthermore, the operating margin is simply revenue.
  • The operating margin is found by dividing net operating income by total revenue.

• Recording Sales

  • Net sales are gross sales minus sales returns, sales allowances, and sales discounts.
  • In financial ratios that use income statement sales values, "sales" refers to net sales, not gross sales.
  • Gross sales are the sum of all sales during a time period.
  • Net sales are gross sales minus sales returns, sales allowances, and sales discounts.
  • Gross sales do not normally appear on an income statement.

• The Marginal Cost of Capital

  • The marginal cost of capital is the cost needed to raise the last dollar of capital, and usually this amount increases with total capital.
  • The marginal cost of capital is calculated as being the cost of the last dollar of capital raised.
  • Generally we see that as more capital is raised, the marginal cost of capital rises .
  • The marginal cost of capital can also be discussed as the minimum acceptable rate of return or hurdle rate.
  • The Marginal Cost of Capital is the cost of the last dollar of capital raised.