This average gross margin calculator will help you to evaluate the weighted average gross margin for a business.
Commonly a business will have a number of product lines and know the gross margin on each. To calculate the average gross margin for the business it is necessary to weight each product margin by its analog revenue.
Average Gross Margin Calculator
The Excel sheet, available for download below, helps a business calculate the weighted average gross margin by entering gross margins and revenue for up to ten product lines.
Gross Profit Formula
The gross profit formula is used to calculate gross profit. Gross profit, sometimes referred to as gross margin, is the difference between the revenue and the cost of goods sold for a business.
Gross Profit (GP) = Revenue from Sales (R) – Cost of goods sold (COGS)
In accounting sales revenue refers to the budgetary amount from the sale of goods and services in which the business normally trades and which were bought for the purpose of resale. Sales returns and allowances, and sales discounts are deducted to arrive at the sales revenue figure to use in the gross profit formula calculation.
Cost of Goods Sold
Cost of goods sold is the costs associated with producing the goods which have been sold during an accounting period.
Readjust the Formula
Gross profit formula can be readjusted in various ways to provide useful information depending on what information is already known.
For example, if you only know the cost of goods sold and the gross profit percentage, you can calculate the revenue and the gross profit using the gross profit formula.
Few ways of rearranging the formula.
Gross Profit Formula Uses
|Gross Profit Formula Use||Formula|
|Calculate gross profit||GP = R – COGS|
|Calculate revenue||R = COGS + GP|
|Calculate cost of goods sold||COGS = R – GP|
|Calculate gross profit %||GP% = GP / R = (R – COGS) / R|
|Calculate revenue||R = COGS / (1- GP%)|
For example, a business knows that its cost of goods sold is 300,000 and its gross profit percentage is 30% and wants to find its gross profit.
The gross profit formula tells us that Revenue = Cost of goods sold + Gross profit. So if gross profit is 30% of revenue, then cost of goods sold must be the remaining 70% of revenue. This determination in the diagram below.
Gross Profit Percentage
- Revenue = 100%
- Cost of goods sold = 70%
- Gross Profit = 30%
If variable costs are 70% of revenue it follows that:
Cost of goods sold = 70% x Revenue
Revenue = Cost of goods sold / 70% = 300,000 / 70% = 428,571
Finally use the formula again
Gross Profit Margin = Revenue – Cost of goods sold
Gross Profit Margin = 428,571 – 300,000 = 128,571
The check is that Gross profit % = Gross Profit / Revenue = 128,571 / 428,571 = 30%
The gross profit formula is very useful for calculating the gross profit of a business. The gross profit is an important concept as it represents the true income of a business.