How to calculate the gross profit

One of the most important financial concepts that will have to learn to manage your new business is the calculation of net operating income. And the tool that is used to maintain the gross margin is the profit margin.

The gross profit of a product is calculated as follows:

Sales – Cost of goods sold = Gross profit

To understand gross profit, it is important to know the difference between fixed and variable costs.

Variable costs are the things that change depending on the amount of product being made and have committed as a direct result of the production of the product.

Variable costs include:

equipment used
direct labor
salaries factory supervisor
Utilities for a factory or warehouse
Amortization expense of production equipment
Fixed costs are generally static in nature. They understand:

office expenses, such as supplies, utilities, office phone, etc.
Wages and salaries of office employees, vendors, agents and owners
payroll taxes and benefits
Advertising, promotion and other selling expenses
car expenses for sellers
professional fees
Variable expenses are recorded in cost of sales. Fixed costs are recognized as operating expenses (sometimes called cost of sales and general administration.

While the gross profit is a dollar amount, gross margin expressed as a percentage. It is equally important to follow because it lets you keep an eye on trends in profitability.

This is critical because many companies have had financial problems with a gross margin each time coincided with a decline in gross profit margin.

Gross profit is calculated as follows:

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Gross Profit / Sales = Gross Profit Margin

There are two main ways for you to improve your gross margin. First, you can increase your prices. Second, you can reduce the cost of production of its products. Of course, both are easier said than done.

An increase in the selling price can diminish. If sales fall too, can not generate enough dollars gross margin to cover operating expenses. Price increases require a very careful reading of inflation, competitive factors, and basic supply and demand of the product to produce.

The second method to increase the gross profit margin is to reduce variable costs to produce their product. This can be achieved by reducing hardware costs and make more effective the product.

Volume discounts are a good way to reduce hardware costs. The more material you buy from a vendor, more are likely to offer discounts.

Another way to reduce the cost of materials is to find a cheaper supplier. However, it is possible to sacrifice quality if the goods purchased are not too do.

a manufacturing, wholesale, retail or service should always be looking for ways to provide more efficient your product or service starts.

However, it is also necessary to balance the problems of efficiency and quality to ensure they do not leave balance.

Consider the gross profit of ABC Clothing Inc. as an example of the calculation of gross margin. In one year, sales were $ 1 million and gross profit was $ 250,000, resulting in a gross profit margin of 25 percent ($ 250,000 / $ 1 million). In second year, sales were $ 1.5 million and gross profit was $ 450,000, resulting in a gross profit margin of 30 percent ($ 450,000 / $ 1.5 million).

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Obviously Clothing ABC not only earned $ gross profit of over 2 years, but also a higher gross profit margin. The price is high, society, reduce variable costs material suppliers or find a way to produce clothes more efficiently (which usually means fewer working hours per product produced).

ABC clothes does a better job in year 2 of the management of their profit margin in clothing manufacturing.

Many business owners are often confused when marking a relative gross margin. They are first cousins, that both calculations are the same variables. The difference is that the gross margin is calculated as a percentage of the selling price, while the profit margin is calculated as a percentage of the cost of the seller.

The marking is calculated as follows:

(Sale price – production cost) / cost of production = Percent Markup

Calculate the profit margin for ABC Clothing for year 1:

(Millions of $ 1 – $ 750,000) / $ 750,000 = 33.3%

Now let’s calculate the profit margin for ABC Clothing for year 2:

million / $ 1.05 = 42.9% – ($ 1.5 million $ 1.05 million)

Although the calculation of the profit margin for an entire year for a business is very simple, using these tools daily value marking work up the price proposals it is more complicated. However, it is even more vital.