How to Use Financial Reports to Calculate Gross Margin - dummies

How to Use Financial Reports to Calculate Gross Margin

By Lita Epstein

Gross margin looks at the profit margin based solely on sales and the cost of producing those sales. For financial reporting, it gives you a picture of how much revenue is left after subtracting all the direct costs of producing and selling the product. These costs can include discounts offered, returns, allowances, production costs, and purchases.

To calculate gross margin, divide gross profit by net sales or revenues:

Gross profit ÷ Net sales or revenues = Gross margin

You can find gross profit at the bottom of the sales or revenue section of the income statement. Net sales are at the top of the same section.

Using numbers from Mattel’s income statement, you can calculate its gross margin:

$3,409,197 (Gross profit) ÷ $6,420,881 (Net sales) = 53.1% (Gross margin)

Mattel made a gross profit of 46.5 percent on each dollar of sales. Compare this number with Hasbro’s gross margin (using numbers from its income statement). Hasbro doesn’t show gross profit, so you must calculate it first by subtracting cost of goods sold ($1,671,980) from net revenues:

$2,417,003 (Gross profit) ÷ $4,088,983 (Net sales) = 59.1% (Gross margin)

Hasbro has about 6 percent more revenue left after it subtracts its direct costs than Mattel has, which shows that Hasbro has better cost controls on the purchase or production of the toys it’s selling.