How to Calculate Weighted Gross Margin

Gross margin is finance term used to describe the profit margin of a specific product sold by a company. The weighted gross margin is the weighted average profit margin of all products sold by the company. Weighted averages assign weights to figures based on the figures percentage of a total. In the case of gross margins, the weighted average considers each product's percentage of total sales.

Calculate the gross profit for each product sold by a company. To determine gross profit for a product, subtract the cost of the goods sold from the gross sales revenue for each product. For example, assume a product sold for $100 and cost $25 to produce. $100 - $25 = $75. This figure represents the gross profit for the product. Repeat for the other products sold by company.

Determine the gross profit margin for each product. Divide the gross profit by the gross sales revenue for the product. Continuing the same example, $75 / $100 = 75 percent. Repeat for the other products sold by the company.

Find the percentage of your total sales that each product makes up. For example, assume the company has total sales for a period of $10,000 for all products and they sold 25 units of a product at $100. Calculate total sales revenue for the product by multiplying the number of units by the selling price. Continuing the same example, 25 x $100 = $2500. Divide this figure by the total revenue. Continuing the same example, $2,500 / 10,000 = 25 percent. Repeat for the other products sold by the company.

Calculate the weighted gross margin for all products sold by the company. Multiply each products gross profit margin by that product's percentage of total sales. Continuing the same example, 75 percent x 25 percent = 18.75 percent. Repeat for each product sold by the company. Assume this company sells three products and the resulting calculations were 18.75, 24 and 28. Find the sum of these calculations. Continuing the same example, 18.75 + 24 + 28 = 70.75 percent. This figure represents the weighted gross margin for the company.

References

  • "Principles of Finance"; Scott Besley and Eugene Brigham; 2008

About the Author

Since 1992 Matt McGew has provided content for on and offline businesses and publications. Previous work has appeared in the "Los Angeles Times," Travelocity and "GQ Magazine." McGew specializes in search engine optimization and has a Master of Arts in journalism from New York University.