How this calculator works
Gross margin compares revenue with the direct cost of the goods or services sold. It excludes operating expenses such as marketing, administration and rent, which are deducted further down the income statement. A high gross margin means the business has room to cover those costs and still earn a profit, or that it sells differentiated products with pricing power. A low gross margin leaves little buffer and makes the business sensitive to cost inflation. Gross margin and markup are related but not the same: a 40 per cent gross margin corresponds to a 66.7 per cent markup on cost.
Formula
Gross profit = revenue - cost of goods sold. Gross margin = gross profit / revenue. Revenue = cost of goods sold / (1 - gross margin). Cost of goods sold = revenue × (1 - gross margin).
Worked example
Revenue of $1,000,000 and cost of goods sold of $600,000 give gross profit of $400,000 and a gross margin of 40 per cent. At the same margin, revenue of $1,500,000 would produce $600,000 of gross profit.
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Frequently asked questions
What belongs in cost of goods sold?
The direct costs of producing what was sold: materials, direct labour, manufacturing overhead and freight in. Selling, general and administrative costs are operating expenses, not cost of goods sold. Service businesses often have very little cost of goods sold.
How is gross margin different from markup?
Markup compares gross profit with cost, while gross margin compares it with revenue. Selling for $100 something that cost $60 is a markup of 66.7 per cent and a gross margin of 40 per cent. Confusing the two is a common pricing error.
Can gross margin exceed 100 per cent?
Only if cost of goods sold is negative, which does not happen in normal trading. A negative cost can arise from accounting reversals, but it is not a useful input for this calculation. Margins above 100 per cent should be treated as data errors.