How to calculate gross margin artisan | 9 Exercises

Application: Art Co Creations

States :

Art Co Créations is a craft company specializing in the manufacture of art pottery. The company wishes to determine the gross margin of the products it sells to evaluate its financial performance. The following information is given to you for a specific type of pottery:

• Unit production cost: €80
• Unit sale price: €150
• Quantity sold during the month: 200 units

Work to do :

1. What is the unit margin amount for each pottery sold?
2. Calculate the overall margin made on all pottery sold during the month.
3. Determine the cost margin rate. What percentage does this represent?
4. If the unit production cost increases by €10, how will this affect the unit margin?
5. Discuss the strategic implications of a margin decline on the viability of the business.

Proposed correction:

1. To calculate the unit margin, the following formula is used: Unit Margin = Unit Selling Price – Unit Production Cost.
   By replacing, we get: €150 – €80 = €70.
   The unit margin per pottery is therefore €70.

2. The overall margin is obtained by multiplying the unit margin by the quantity sold: Overall Margin = Unit Margin x Quantity Sold.
   Which gives: €70 x 200 = €14.
   So the overall margin for the month is €14.

3. The margin rate is calculated by: Margin Rate = ((Sales Price excluding VAT – Production Cost excluding VAT) ÷ Production Cost excluding VAT) x 100.

Which implies: ((€150 – €80) ÷ €80) x 100 = 87,5%.
The cost margin rate is therefore 87,5%.

4. If the unit production cost increases by €10, the new production cost will be €90.
   The new unit margin becomes €150 – €90 = €60.
   Therefore, the increase in costs reduces the unit margin to €60.

5. A decrease in margin means that the company generates less profit for each pot sold. This can affect its ability to invest in product development, marketing and future growth, compromising long-term viability and competitiveness.

Formulas Used:

Title	Formulas
Unit Margin	Unit Selling Price – Unit Production Cost
Overall Margin	Unit Margin x Quantity Sold
Margin rate	((Sales Price excluding VAT – Production Cost excluding VAT) ÷ Production Cost excluding VAT) x 100

Application: Village Bread

States :

Le Pain du Village is a bakery that makes artisanal breads that are famous for their unique taste. As part of their profitability assessment, they seek to calculate the gross margin on their flagship products. Here is the data for their sourdough bread:

• Manufacturing cost per loaf: €1,50
• Selling price: €3,80
• Number of loaves sold in one week: 500

Work to do :

1. What is the unit margin for each sourdough loaf sold?
2. Determine the total margin for the week relating to the sale of these loaves.
3. Calculate the markup rate for this product.
4. If the selling price is reduced by €0,50, what will the new unit margin be?
5. Evaluate the potential impact of this price reduction on customer retention strategy.

Proposed correction:

1. Calculating the unit margin: Selling Price – Manufacturing Cost = €3,80 – €1,50 = €2,30.
   So the unit margin for each loaf is €2,30.

2. For the total margin: Unit Margin x Number of Loaves Sold = €2,30 x 500 = €1.
   The total margin for the week is therefore €1.

3. The markup rate is determined as follows: Markup Rate = ((Selling Price – Manufacturing Cost) ÷ Selling Price) x 100.

Using the numbers: ((€3,80 – €1,50) ÷ €3,80) x 100 = 60,53%.
The markup rate is 60,53%.

4. If the sale price falls by €0,50, the new price is €3,30.
   The new unit margin is therefore €3,30 – €1,50 = €1,80.
   The price reduction results in a unit margin of €1,80.

5. While price reduction may attract more customers in the short term, it is crucial to monitor whether this strategy negatively affects the perceived value of the product. Maintaining quality while adjusting prices is essential to ensure lasting customer loyalty.

Formulas Used:

Title	Formulas
Unit Margin	Selling Price – Manufacturing Cost
Total Margin	Unit Margin x Number of Loaves Sold
Brand taxes	((Selling Price – Manufacturing Cost) ÷ Selling Price) x 100

Application: Light Design

States :

Lumière Design, a company that manufactures artisanal lamps, wants to understand the performance of its flagship product: the “Étoile” bedside lamp. Here are the details:

• Production cost per lamp: €35
• Selling price per lamp: €75
• Quantity sold this quarter: 300 lamps

Work to do :

1. Calculate the margin achieved per lamp.
2. What is the company's total margin for this product for the quarter?
3. Find the margin rate for this product.
4. If the selling price is increased by €5, calculate the effect on the unit margin.
5. What could be the advantages and disadvantages of such a price increase?

Proposed correction:

1. The margin made per lamp is calculated by: Sales Price – Production Cost = €75 – €35 = €40.
   The margin per lamp is therefore €40.

2. The total margin for the quarter is obtained by doing: Margin per Lamp x Quantity Sold = €40 x 300 = €12.
   The total margin for this quarter is €12.

3. The margin rate is calculated as follows: Margin Rate = ((Sales Price – Production Cost) ÷ Production Cost) x 100.

Applying the values: ((€75 – €35) ÷ €35) x 100 = 114,29%.
The margin rate for this product is 114,29%.

4. With a sales price increased to €80, the new unit margin becomes: €80 – €35 = €45.
   An increase in price results in an increase in the unit margin to €45.

5. Increasing the price can boost profits but also deter some customers. However, if the product is perceived as premium, it can have a positive effect by enhancing its brand image.

Formulas Used:

Title	Formulas
Margin per Lamp	Selling Price – Production Cost
Total Margin	Margin per Lamp x Quantity Sold
Margin rate	((Selling Price – Production Cost) ÷ Production Cost) x 100

Application: Flavors of the Earth

States :

Saveurs de la Terre is an organic company that offers artisanal jams made from the fruits of their orchards. In order to improve their margins, they want to know the profitability of their strawberry jams. Here is the data:

• Manufacturing cost per pot: €2
• Selling price per pot: €5,5
• Number of pots sold per month: 800

Work to do :

1. Determine the margin for each jar of jam sold.
2. What is the total margin generated over a one month period?
3. Calculate the markup rate for strawberry jams.
4. If a new major customer negotiates a sale price of €5, what will the new unit margin per pot be?
5. Discuss the risks and opportunities associated with accepting the new client's proposal.

Proposed correction:

1. The margin for each pot is calculated as follows: Selling Price – Manufacturing Cost = €5,5 – €2 = €3,5.
   The unit margin for each jar of jam is therefore €3,5.

2. For the total monthly margin: Margin per Pot x Number of Pots = €3,5 x 800 = €2.
   The total monthly margin is then €2.

3. The markup rate is calculated by: Markup Rate = ((Selling Price – Manufacturing Cost) ÷ Selling Price) x 100.

Which gives: ((€5,5 – €2) ÷ €5,5) x 100 = 63,64%.
The markup rate is therefore 63,64%.

4. With a selling price of €5, the new margin is: €5 – €2 = €3.
   A reduction in the selling price reduces the unit margin to €3.

5. Accepting the lower price may generate excess sales volume, but there is a risk of reducing profitability. The company must assess whether the volumes compensate for the margin decline and consider the implications for product positioning.

Formulas Used:

Title	Formulas
Margin per Pot	Selling Price – Manufacturing Cost
Total Margin	Margin per Pot x Number of Pots
Brand taxes	((Selling Price – Manufacturing Cost) ÷ Selling Price) x 100

Application: Eco Couture

States :

Eco Couture is a growing company specializing in eco-friendly clothing. They want to evaluate the performance of their popular summer dress. You have the following:

• Manufacturing cost per unit: €25
• Selling price: €60
• Number of units sold this season: 400

Work to do :

1. What is the margin per dress?
2. Calculate the total turnover for this season.
3. Determine the total margin for this season.
4. By what mechanisms could the company increase the margin rate without increasing the selling price?
5. Why is margin tracking crucial for an eco-friendly clothing company?

Proposed correction:

1. The margin per dress is calculated by subtracting the manufacturing cost from the selling price: €60 – €25 = €35.
   Each dress provides a margin of €35.

2. Total turnover is the product of the sales price times the number of units: €60 x 400 = €24.
   The turnover is therefore €24 for the season.

3. The total margin is obtained by multiplying the margin by the number of units sold: €35 x 400 = €14.

The total margin is therefore €14.

4. Eco Couture could improve the margin rate by reducing manufacturing costs, for example by optimizing the supply chain or increasing the efficiency of production processes without compromising quality.

5. Margin monitoring is vital for Éco Couture because it ensures financial viability while respecting eco-responsible commitments. Optimal margin management allows reinvestment in sustainable raw materials and supports ethical growth.

Formulas Used:

Title	Formulas
Margin by Dress	Selling Price – Manufacturing Cost
Turnover	Selling Price x Number of Units
Total Margin	Margin per Dress x Number of Units

Application: Bio Ceramics

States :

Bio Céramique is a company that produces eco-friendly ceramic kitchenware. To analyze their profits, they look at their flagship product: the ceramic bowl. Available data:

• Unit production cost: €12
• Unit sale price: €30
• Quantity sold this semester: 600

Work to do :

1. How much profit does Bio Céramique make per bowl sold?
2. What is the total half-yearly gross margin on these sales?
3. Calculate the margin rate for this product.
4. If production costs increase by €3, how will this affect the margin rate?
5. Consider the strategic importance of improving operational efficiency to maintain competitiveness.

Proposed correction:

1. The profit per bowl is given by: Selling Price – Production Cost = €30 – €12 = €18.
   Each bowl sold therefore generates a profit of €18.

2. The half-yearly gross margin is calculated as follows: Profit per Bowl x Quantity Sold = €18 x 600 = €10.
   The half-yearly gross margin is €10.

3. The margin rate is calculated by: Margin Rate = ((Sales Price – Production Cost) ÷ Production Cost) x 100.

Which gives: ((€30 – €12) ÷ €12) x 100 = 150%.
The margin rate is therefore 150%.

4. With a production cost increased to €15, the new margin is: €30 – €15 = €15.
   The new margin rate is: ((€30 – €15) ÷ €15) x 100 = 100%.
   Increasing costs significantly affect profitability, reducing the margin rate to 100%.

5. Improving operational efficiency, such as reducing waste and optimizing processes, is crucial to maintaining a healthy margin. This helps offset unintended cost increases and maintain a competitive offering.

Formulas Used:

Title	Formulas
Profit per Bowl	Selling Price – Production Cost
Half-yearly Gross Margin	Profit per Bowl x Quantity Sold
Margin rate	((Selling Price – Production Cost) ÷ Production Cost) x 100

Application: Leather Workshop

States :

Atelier Cuir is a renowned craftsman for its leather belts. They need to understand gross margins to refine their market strategy. Here is the data:

• Manufacturing cost per belt: €25
• Selling price: €65
• Quantity sold in the last quarter: 250 belts

Work to do :

1. Calculate the unit margin for each belt.
2. Determine the total margin on sales for the quarter.
3. What is the markup rate of this product?
4. If a competitor lowers its prices sharply, how can Atelier Cuir maintain its margins?
5. What strategic options does the company have to solidify its market position?

Proposed correction:

1. The unit margin per belt is: €65 – €25 = €40.
   The margin for each belt is therefore €40.

2. The total margin for the quarter is: €40 x €250 = €10.
   The total margin for the quarter is €10.

3. The markup rate is calculated as follows: ((Selling Price – Manufacturing Cost) ÷ Selling Price) x 100.

Substituting: ((€65 – €25) ÷ €65) x 100 = 61,54%.
The markup rate is therefore 61,54%.

4. To maintain its margins against the competition, Atelier Cuir can differentiate its products by quality, improve design, or further optimize its production costs. Strengthening brand loyalty through excellent customer service can also be decisive.

5. The company can diversify its range, invest in better communication with its target or enter new markets. Innovation and strengthening its brand perception are also strategic for a solid position.

Formulas Used:

Title	Formulas
Unit Margin	Selling Price – Manufacturing Cost
Total Margin	Unit Margin x Quantity Sold
Brand taxes	((Selling Price – Manufacturing Cost) ÷ Selling Price) x 100

Application: The Soap Box

States :

La Boîte à Savon makes high quality handmade soaps. To track their profitability, they want to analyze the margins on their foaming soap:

• Unit manufacturing cost: €3,20
• Selling price per soap: €7
• Quantity sold per month: 1 soaps

Work to do :

1. What is the margin per soap sold?
2. Calculate the total gross margin for this month.
3. Calculate the margin rate per product.
4. Considering an increase in raw material prices, how important is a prudent price adjustment?
5. Discuss the implications of repositioning the product line towards a more premium audience.

Proposed correction:

1. The margin per soap is determined by: €7 – €3,20 = €3,80.
   So, each soap sold brings in a margin of €3,80.

2. The total gross margin is: €3,80 x 1 = €000.
   The total margin for the month is €3.

3. The margin rate is given by: ((Selling Price – Manufacturing Cost) ÷ Manufacturing Cost) x 100.

This gives: ((€7 – €3,20) ÷ €3,20) x 100 = 118,75%.
The margin rate is 118,75%.

4. A careful adjustment of the selling price is essential to compensate for the increase in costs without losing customers. The strategy must maintain the balance between an attractive price and an acceptable return on investment.

5. By repositioning itself towards a more upscale market, La Boîte à Savon can justify higher prices for products perceived as more luxurious. This can reinforce the understanding of added value, but also requires adapted communication and branding.

Formulas Used:

Title	Formulas
Margin by Soap	Selling Price – Manufacturing Cost
Total Gross Margin	Margin per Soap x Quantity Sold
Margin rate	((Selling Price – Manufacturing Cost) ÷ Manufacturing Cost) x 100

Application: Glass Design

States :

Glassblowing specialist Design en Verre wants to analyze the profitability of its luxury vases. To do this, they examine current margins. Here are the details:

• Manufacturing cost: €150
• Selling price: €300
• Number of vases sold this quarter: 80

Work to do :

1. Calculate the unit margin per vase.
2. What is the total gross margin for the period?
3. Determine the mark rate of the vase.
4. If a competitor offers a similar product at a lower price, how can Design en Verre differentiate itself?
5. What would be the financial impacts of a price reduction to boost sales?

Proposed correction:

1. The unit margin per vase is calculated as follows: €300 – €150 = €150.
   Each vase sold generates a margin of €150.

2. The total gross margin for the quarter is: €150 x 80 = €12.
   The total is therefore €12.

3. The markup rate is calculated by: ((Selling Price – Manufacturing Cost) ÷ Selling Price) x 100.

Which gives: ((€300 – €150) ÷ €300) x 100 = 50%.
The markup rate is 50%.

4. To differentiate itself, Design en Verre could emphasize customization, quality of finish and limited editions. A strong brand image and an artisanal story can also appeal to a premium market segment.

5. A price cut could boost sales, but must be balanced against reduced margins per unit. The company risks eroding its profits and its perception of luxury if the balance between price and perceived value is not maintained.

Formulas Used:

Title	Formulas
Unit Margin	Selling Price – Manufacturing Cost
Total Gross Margin	Unit Margin x Number of Vases
Brand taxes	((Selling Price – Manufacturing Cost) ÷ Selling Price) x 100