Physical inventory and cycle-counting. Inventory shrinkage and obsolescence. The opportunity cost of the money invested in inventory. That is, how much could you make if the money tied up in inventory was invested in a relatively safe, income-producing investment. Unfortunately the cost of carrying inventory is not considered in calculating gross margin.
Gross margin is calculated by dividing gross profit dollars by sales dollars.
The adjusted gross margin percentage comes closer to measuring the true profitability of a product, product line, branch inventory or the entire company. Using this information let's calculate the adjusted margin percentage for the two product lines and see which is a better investment. The product lines aren't equally profitable. Many product lines, especially those that call for a tremendous inventory of repair parts, require a substantial investment in inventory. This investment must be considered when you establish your selling prices and the profit you must receive from each sale.