GROSS PROFIT MARGIN

GROSS PROFIT MARGIN (GPM) is one of the key performance indicators. The gross profit margin gives an indication on whether the average markup on goods and services is sufficient to cover expenses and make a profit. GPM shows the relationship between sales and the direct cost of products/services sold. It measures the ability of both to control costs and to pass along price increases through sales to customers. The gross profit margin should be stable over time. A persistent gradual decrease is likely to indicate that productivity needs to be increased to return profitability back to previous levels.   The Gross Profit Margin illustrates the profit a company makes after paying off its Cost of Goods sold (cost of inventory). Gross Profit Margin illustrates to us how efficient the management is in using its labour and raw materials in the process of production. The formula for Gross Profit Margin is: Formula: Gross Profit / Net Revenue or Gross Profit Margin = (Sales - Cost of Goods Sold) / Sales For example, imagine a company with Gross Sales for 2006 equalling $5 million. The cost of goods sold amounts to $1.2 million. What is the Gross Profit Margin? Gross Profit Margin = (5,000,000 - 1,200,000) / 5,000,000 Gross Profit Margin = 3,800,000 / 5,000,000 Gross Profit Margin = 76% G