What is Foolsaurus?

It's a glossary of investing terms edited and maintained by our analysts, writers and YOU, our Foolish community.

How to Calculate the Amount of Gross Margin in Accounting

Original post by Mark Kennan of Demand Media

The gross margin denotes the relationship between the price the company pays and the sales price.

Gross margin quantifies the relationship between a company's costs of goods sold and the total revenue. The gross margin can be measured as a raw number, which tells you how much of the revenue is left as profit after accounting for the cost of goods sold. As a percentage, it can tell you how much of the company's total revenues are left after accounting for the costs of goods sold. Higher margins means the company is keeping more money for each dollar of revenue.

Step 1

Look up a company's total cost of goods sold and total revenues in its annual report. You can usually find the company's annual report online on their investor relations website.

Step 2

Subtract the company's total costs of goods sold from the company's total revenues to find the gross margin as a raw number. For example, if the company paid $16 million for the goods it sells, and had a total revenue of $25.3 million, subtract $16 million from $25.3 million to find the gross margin equals $9.3 million.

Step 3

Divide the gross margin as a raw number by the total revenue and multiply the result by 100 to find the gross margin percentage. In this example, divide $9.3 million by $16 million 0.58125 and multiply by 100 to find the company's gross margin percentage equals 58.125 percent.



About the Author

Mark Kennan is a freelance writer specializing in finance-related articles. He has worked as a sports editor for "Ring-Tum Phi" and published articles on a number of online outlets. Kennan holds a Bachelor of Arts in history and politics from Washington and Lee University.

Photo Credits

  • IT Stock Free/Polka Dot/Getty Images