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The formula for calculating gross profit margin is:
Gross Profit Margin = (Gross Profit / Total Revenue) x 100%
where gross profit is the difference between the total revenue and the cost of goods sold.
To calculate the gross profit, subtract the cost of goods sold from the total revenue:
Gross Profit = Total Revenue – Cost of Goods Sold
Once you have the gross profit, divide it by the total revenue and multiply the result by 100% to get the gross profit margin as a percentage:
Gross Profit Margin = (Gross Profit / Total Revenue) x 100
Let’s say a company sells handmade candles, and their revenue for the year was $100,000. The cost of materials to make the candles was $30,000, and labour costs were $20,000 The gross profit would be the revenue minus the cost of goods sold, which in this case would be:
Gross Profit = Revenue – COGS Gross Profit = $100,000 – ($30,000 + $20,000). Gross Profit = $50,000
Now, to calculate the gross profit margin, we need to divide the gross profit by the revenue and express it as a gross profit percentage:
Gross Profit Margin = (Gross Profit / Revenue) x 100% Gross Profit Margin = ($50,000/$100,000) x 100% Gross Profit Margin = 50%
So the gross profit margin for this company is 50%, meaning that for every dollar of revenue, they are able to keep 50 cents as gross profit after accounting for the cost of goods sold.
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