Gross Margin = The selling Price – cost to purchase or produce the item.
If a Bubba’s Convenience Store buys a candy bar for 75¢ and sells that candy bar for $1 then Bubba’s Gross Margin is 25¢. This should not be confused with profit because Bubba still has to pay other expenses out of the 25¢ it made on the candy bar.
If Bubba wants to know his Gross Margin expressed as a percentage then he would calculate the following.
Gross Margin = ((Selling Price –Cost) X 100)/Selling Price
Selling Price – Cost
$1-75¢ = 25¢
25¢ X 100= 25
Gross Margin is 25%
Bubba has a Gross Margin of 25¢ which just happens to be 25% in this case.
Let’s say that Bubba hasn’t sold the candy bar and he is afraid it will get old sitting on his shelf. So, he reduces the selling price to 90¢ and it sells. In this case his selling price is 90¢ but his cost is still 75¢. So
Selling Price 90¢ - Cost 75¢
Gross Margin 15¢
15¢ X 100= 15
So his Gross Margin is 15¢ and his Gross Margin Percentage is 16.67%
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