Gross Profit Margin | = | Gross Profit | * 100 |
Turnover |
Remember:
Turnover = Sales
Gross Profit = Turnover - Cost of Sales
The gross profit margin ratio tells us the profit a business makes on its cost of sales, or cost of goods sold. It is a very simple idea and it tells us how much gross profit per £1 of turnover our business is earning.
Gross profit is the profit we earn before we take off any administration costs, selling costs and so on. So we should have a much higher gross profit margin than net profit margin.
Here are a few examples of the gross profit margins from different businesses:
Leisure & Hotels | International Airline | Manufacturer | Retailer | Discount Airline | Refining | Pizza Restaurants | Accounting Software | |
---|---|---|---|---|---|---|---|---|
Gross profit | 9.64% | 5.62% | 35.14% | 11.41% | 27.46% | 11.99% | 47.52% | 89.55% |
See how the gross profit margins vary from business to business and from industry to industry. For example, the international airline has a gross profit margin of only 5.62% yet the accounting software business has a gross profit margin of 89.55%.
If a company's raw materials and factory wages go up a lot, the gross profit margin will go down unless the business increases its selling prices at the same time.
Source:
http://www.bized.co.uk/
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