How to Calculate Gross Profit Margin
So how does one calculate gross profit margin -- GPM? Hi, I'm Jimmy Chang, and I've been teaching college mathematics for almost a decade. And we're here to calculate that little ratio known as the GPM. Now, just to remind you, the gross profit margin is a ratio that indicates profitability before you take into account the different costs that are involved. And here's the formula, but there's one thing I want you to kind of keep in mind first in that oftentimes when people talk about gross profit, they actually refer to total revenue. So when you see gross profit, you got to, you know, keep that in mind. It is actually a measure of what the total revenue happens to be. Now, the formula for the gross profit margin, GPM for short, is here. Now, you take the gross profit -- the total revenue -- you subtract by the total cost of sales. That's going to be the numerator of this ratio, and then you take that number and you're going to divide by the gross profit. Now, here's an example as to how that works. Suppose you have a gross profit of 70,000 dollars and you subtract by the total cost of sales for that particular period -- let's just say that quarter, 34,00 dollars. Now, what's going to happen is you subtract those two numbers. You're going to get 36,000 dollars, and you're going to divide by 70,000 dollars on your calculator. Now, when you plug it in, you're going...and you divide, you're going to get a number .5143, approximately. But what's really going to be practical, though, is you're going to convert that decimal. Right it...shift the decimal over two places to 51.43 percent. Now, that is going to be your gross profit margin. Now, that's going to give you an indicator as to how well you did that quarter. Now, if you are satisfied with the GPM that you have, then that's great. You want to stay on top of that target. But if you feel that your gross profit margin can be more, in this case -- higher than 51.43 percent -- then one thing that you definitely would want to consider is you may have to keep your costs lower for future quarters so that if you take in the same amount of revenue and your costs are lower, your GPM will definitely be higher. So my name is Jimmy Chang, and that is an indicator as to how to calculate your gross profit margin.