The formula to calculate gross profit margin is:Gross Profit Margin = Gross Profit / Revenue x 100
Let’s look at an example to see how this works:FYR Company is an e-commerce shop selling customised gifts. In 2020, they gained a revenue of $700,000 from selling customised mugs. The cost of goods sold (the direct cost of producing the shirts) is $200,000.All other operating expenses are $400k.Now let’s calculate the gross and net profit margins for FYR Company in 2020.
Income Statement:Revenue: $700,000Cost of Goods Sold: ($200,000)Gross Profit: $500,000Other Expenses: ($400,000)Net Income: $100,000
Based on the above income statement figures, the answers are:FYR’s gross margin equals $500,000 of gross profit divided by $700,000 of revenue, which equals 71.4%.
Net margin is $100k of net income divided by $700k of revenue, which equals 14.3%.