Gross margin is the amount of revenue a company retains after production costs. Production costs are the firm's cost of goods sold. Firms often express gross margin as a percentage of revenue. Managers use gross margin to determine how much revenue a product will generate above the product's production costs and as a starting point on where to set prices to obtain a desired profit.
Determine the firm's revenue and cost of goods sold. These will often be the first two lines on the firm's income statements. For example, Firm A had revenue of $200,000. The firm's cost of goods sold for the year was $125,000.
Subtract the firm's cost of goods sold from the firm's revenue to calculate the gross margin. In the example, $200,000 minus $125,000 equals a $75,000 gross margin.
Divide the gross margin by revenue to calculate gross margin percentage. In the example, $75,000 divided by $200,000 which equals a gross margin percentage of 37.5 percent.
