Question

Gross Margin Percentage = (Unit selling price - COGS)/Unit selling price

Could someone make me an example of using this formula in a word problem, and then show me how to work it out?

Thanks!

Answer 1

Answer:

We will understand the concept by taking one example:

ABC Co. makes the production of Umbrellas. Per Umbrella ABC Co. generates revenue of $ 10 & Cost of goods sold is $ 7 per umbrella. (Cost of goods sold includes the Material cost , labour cost and other overhead cost)

First we need to calculate what is Gross margin means nothing but Gross profit.

Gross Margin per Umbrella = Unit selling price of Umbrella - Cost of goods sold per Umbrella

= $ 10 - $ 7

    = $ 3

Therefore, Gross Margin $ 3 will be generates by ABC Co. from one umbrella.

ABC Co. also wants to know to how much Gross Margin per unit as % of Selling price they charge.

Gross Margin Percentage = ( Gross Margin / Unit selling price )*100

OR

Gross Margin Percentage = [ ( Unit Selling Price- COGS ) / Unit selling price] * 100

   = [ ( $ 10 - $ 7 ) / $ 10 ] * 100

   = ( $ 3 / $ 10 ) * 100

= 30%

That means on every Umbrella ABC Co. generates 30% of Gross Margin or Gross Profit.

Higher the Gross Margin percentage higher will be the Profit.