Definition of Gross Profit Margin
- The gross profit margin compares the difference between the revenue and cost of goods sold, against revenue.
- It is represented in the form of a percentage.
- It is used to evaluate the company’s financial health.
- A higher markup price and lower cost of goods sold would increase the gross profit margin.
What is the Formula for Gross Profit Margin?
- The gross profit margin is calculated by dividing the difference between revenue and cost of goods sold by revenue.
Gross profit margin = (Revenue – COGS) / Revenue
Gross Profit Margin in Practice
- During COVID- 19, the revenue of Smile Juice dropped down to $87,900; however, the cost of goods sold remains the same at $56,000. What is Smile Juice’s gross profit margin?
- ($87,900 – $ 56,000)/ $87,900 = 36.29%