How to Derive Gross Margin

by C. Taylor

Calculating the gross margin tells you the overall sales profit of a company. This is the percent of gross returns that is attributable to profit alone. This simple calculation can be confusing, especially in the case of retail markup. Although a retailer may mark up a product 80 percent, he may be surprised to know the gross margin is only 44.4 percent.

Subtract the cost of goods sold from the total sales revenue. You can also calculate individual product margin by subtracting a product's wholesale cost from its retail price. As an example, if you marked up a $40 item to $72, which is an 80 percent markup, you would be left with $32 in profit.

Divide this figure by the total sales revenue when calculating overall gross margin. Alternatively, divide this figure by the product's retail price when calculating profit margin for a single item. In the example, $32 divided by $72 gives you 0.444.

Multiply by 100 to convert to a percentage. In the example, you would have a gross margin of 44.4 percent.

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