The gross margin of a single item is a calculation that shows a business the profit earned on the sale of the single item. To calculate the gross margin, you will need to know the gross selling price of the item and the cost of goods sold for the item. A business can use the gross margin figure to evaluate the profitability of individual items it sells.
1. Determine the selling price of the item. For example, assume a widget sells for $5.
2. Determine the cost of good sold for the item. The cost of goods sold represents the inventory cost of the item. For example, assume the COGS for the widget is $3.
3. Subtract the COGS for the item from the sales price of the item. Continuing the same example, $5 - $3 = $2.
4. Divide the figure from Step 3 by the sales price of the item. Continuing the same example, $2 / $5 = 40 percent. This figure represents the gross margin of the widget.
- "Principles of Finance"; Scott Besley and Eugene Brigham; 2008
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