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Gross profit margin is a ratio that indicates how much of a company's revenue represents earnings before selling and administrative expenses. A business can calculate a gross profit margin for an individual product or it can calculate gross profit margin for all sales across all product and service lines. When a business calculates a combined gross profit margin for all products and services, it's referred to as a blended gross profit margin.
Blended Gross Profit Margin Calculation
Calculate net sales from products and services from all departments, divisions and subsidiaries. To calculate net sales, subtract any reported sales returns, sales allowances and sales discounts from gross sales. A business might have none or all of these contra-revenue accounts on its income statement. For example, if a company's gross sales are $400,000 and its returns, allowances and discounts are $100,000, net sales are $300,000.
Calculate the cost of all products and goods sold for the period. There is no cost of goods sold for service sales, but there is for physical products. The cost of goods sold is the total direct labor, direct materials and factory overhead incurred for each unit of inventory sold. Direct labor includes salaries and benefits of employees who work directly with the product. Direct materials are all materials used to create or modify the product. Factory overhead is factory-specific overhead costs such as factory rent, utilities, property taxes, equipment depreciation, equipment supplies and factory manager compensation.
Subtract total cost of goods sold from net sales to calculate blended gross profit. For example, if net sales are $300,000 and the cost of goods sold is $100,000, the blended gross profit from all sources is $200,000. To convert blended gross profit into blended gross profit margin, divide blended gross profit by net sales. In this example, blended gross profit margin would be $200,000 divided by $300,000, or 66.7 percent. This means that out of every dollar in revenue earned, 33.3 cents represents the cost of inventory and 66.7 cents represents earnings before selling and administrative expenses.
Based in San Diego, Calif., Madison Garcia is a writer specializing in business topics. Garcia received her Master of Science in accountancy from San Diego State University.