In this section:
Application: The ChocoDélices Biscuit Factory
States :
Biscuiterie ChocoDélices, famous for its homemade chocolate biscuits, wants to analyze its monthly profitability. The CFO has compiled the following data for the month of September: net sales were €50, raw material costs were €000, and personnel costs were €18. ChocoDélices wants to know its gross production margin in order to better understand its financial results.
Work to do :
- Calculate the gross production margin for the month of September.
- Determine the gross margin rate as a percentage.
- Analyze the effect that a 10% reduction in raw material costs could have on gross margin.
- If ChocoDélices wants to increase its gross margin by 10%, what should be the increase in turnover while keeping costs constant?
- Discuss the strategic implications if revenue decreases by 5% while keeping other costs unchanged.
Proposed correction:
-
Calculation of gross production margin:
To calculate the gross production margin, we must subtract the cost of raw materials and personnel costs from the net sales.
Gross production margin = Net sales – Cost of raw materials – Personnel costs
Gross production margin = €50 – €000 – €18 = €000.
The gross production margin for the month of September is €20. -
Determination of the gross margin rate:
The gross margin rate is calculated by dividing the gross production margin by the net sales, then multiplying the result by 100 to express it as a percentage.
Gross margin rate = (Gross production margin ÷ Net sales) x 100
Gross margin rate = (€20 ÷ €000) x 50 = 000%.
The gross margin rate for September is 40%. -
Effect of a 10% reduction in raw material costs:
A 10% reduction in raw material costs would result in a cost reduction of €1, bringing the new costs to €800.
New gross production margin = €50 – €000 – €16 = €200.
With this reduction, the gross production margin would increase to €21.
-
Necessary increase in turnover to increase gross margin by 10%:
ChocoDélices wants to increase its gross margin by 10% from €20, so the new gross margin would be €000.
Necessary turnover = Gross margin + Cost of raw materials + Personnel costs
Necessary turnover = €22 + €000 + €18 = €000.
Turnover must increase by €2 to reach this new margin. -
Strategic implications of a 5% decrease in turnover:
A 5% decrease in turnover would result in a drop of €2, bringing turnover to €500.
New gross production margin = €47 – €500 – €18 = €000.
Such a reduction would affect profitability, requiring ChocoDélices to assess its fixed costs or improve its sales to maintain the margin.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross production margin | Turnover excluding tax – Cost of raw materials – Personnel costs |
| Gross margin rate | (Gross production margin ÷ Net sales) x 100 |
| Necessary turnover | Gross margin + Cost of raw materials + Personnel costs |
Application: Green Solar Energy
States :
Énergies Solaires Vertes is a company specializing in the manufacture and installation of solar panels. In October, the company achieved a turnover excluding tax of €120. Raw material costs amount to €000, and subcontracting costs to €45. The company wants to estimate its gross production margin to better guide its sustainable development strategy.
Work to do :
- Determine the gross production margin for the month of October.
- Calculate the gross margin rate as a percentage.
- Considering economies of scale, calculate the gross margin if the cost of raw materials is reduced by 15%.
- If Green Solar Energy wants to increase its turnover by 20% while maintaining the same gross margin, how much additional gross margin would that represent?
- Estimate the economic impact of a 10% increase in subcontracting costs on current gross margin.
Proposed correction:
-
Gross production margin:
The gross production margin is obtained by subtracting the costs of raw materials and subcontracting costs from the net sales.
Gross production margin = Net sales – Cost of raw materials – Subcontracting costs
Gross production margin = €120 – €000 – €45 = €000.
The gross production margin for October is €50. -
Gross margin rate:
The gross margin rate is obtained by dividing the gross margin by the turnover and multiplying by 100.
Gross margin rate = (Gross production margin ÷ Net sales) x 100
Gross margin rate = (€50 ÷ €000) x 120 = 000%.
The gross margin rate recorded is 41,67%. -
Reduction of raw material costs by 15%:
A 15% reduction would reduce raw material costs to €38.
New gross production margin = €120 – €000 – €38 = €250.
With this reduction, the gross margin would increase to €56.
-
Required increase in gross margin following a 20% increase in turnover:
If the turnover is increased by 20%, it would become €144.
Targeted gross margin with same gross margin rate = (Gross margin rate) x New revenue
Targeted gross margin = 41,67% x €144 = €000.
So the increase in gross margin required is €10 to maintain the same percentage. -
Consequences of a 10% increase in subcontracting costs:
A 10% increase would increase subcontracting costs by €2, bringing the total charge to €500.
New gross margin = €120 – €000 – €45 = €000.
The increase in subcontracting costs would reduce the gross margin to €47, potentially affecting financial targets.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross production margin | Turnover excluding tax – Cost of raw materials – Subcontracting costs |
| Gross margin rate | (Gross production margin ÷ Net sales) x 100 |
| Targeted gross margin | (Gross margin rate) x New revenue |
Application: Books and Quill Publishing
States :
Livres et Plume Édition is a local publishing house that focuses on publishing regional literature. In November, it generated a turnover excluding tax of €30, incurred printing costs of €000, and incurred other production expenses amounting to €12. Management is interested in understanding their current gross production margin to adjust their sales prices.
Work to do :
- Calculate the gross production margin of Livres et Plume Édition for November.
- Evaluate the gross margin rate and discuss its significance to the business.
- Assume a 5% increase in revenue. Deduct the impact on gross margin if costs remain unchanged.
- Perform a critical analysis if production costs increased by 20%.
- Propose a strategy to improve gross margin without changing revenue.
Proposed correction:
-
Calculation of gross production margin:
Gross margin is determined by subtracting printing costs and other production expenses from net sales.
Gross production margin = Net sales – Printing costs – Other production costs
Gross production margin = €30 – €000 – €12 = €000.
The gross production margin for November amounts to €13. -
Gross margin rate assessment:
The gross margin rate is obtained by dividing the gross margin by the revenue, then multiplying by 100 for the percentage.
Gross margin rate = (Gross production margin ÷ Net sales) x 100
Gross margin rate = (€13 ÷ €000) x 30 = 000%.
A gross margin rate of 43,33% indicates good financial health but also leaves opportunities for optimization. -
Impact of a 5% increase in turnover:
A 5% increase would bring turnover to €31.
New gross margin = €31 – €500 – €12 = €000.
The increase in turnover suggests an increase in gross margin to €14 if costs remain constant.
-
Critical analysis of the 20% increase in production costs:
A 20% increase in production costs represents an addition of €1, which would bring these total costs to €000.
New gross margin = €30 – €000 – €12 = €000.
Growing expenses reduce gross margin, signaling pressure on profitability if adjustments are not made. -
Proposal for improving gross margin:
Livres et Plume Édition could consider reducing printing costs by renegotiating with suppliers or improving production efficiency.
Such optimizations could help improve gross margin without necessarily increasing revenue.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross production margin | Turnover excluding tax – Printing costs – Other production costs |
| Gross margin rate | (Gross production margin ÷ Net sales) x 100 |
| New gross margin | New turnover – Costs – Expenses |
Application: Organic Flavors
States :
Saveurs Bio, an organic food retailer, opened a new store in December. The net sales for this store were €75. The cost of goods sold was €000, and overheads were €35. The company wants to assess its gross production margin to determine the initial profitability of this store.
Work to do :
- Calculate the gross production margin for the new store.
- Determine the gross margin rate and its impact on the pricing strategy.
- Simulate a scenario where overhead is reduced by 10%. What is the new gross margin?
- Imagine that sales increase by 15% next month. What would be the effect on gross margin if costs remain constant?
- Analyze the long-term implications if the cost of purchasing goods continues to increase by 5% each month.
Proposed correction:
-
Calculation of gross production margin:
To calculate, subtract the cost of goods and overheads from net sales.
Gross production margin = Net sales – Cost of purchasing goods – General expenses
Gross production margin = €75 – €000 – €35 = €000.
The gross production margin of the new store is therefore €20. -
Determination of the gross margin rate:
The gross margin rate is obtained by dividing the gross margin by the revenue and multiplying by 100.
Gross margin rate = (Gross production margin ÷ Net sales) x 100
Gross margin rate = (€20 ÷ €000) x 75 = 000%.
A gross margin rate of 26,67% may require a review of the pricing strategy to improve profitability. -
10% reduction in overhead costs:
A 10% reduction in the €20 overheads represents a reduction of €000, reducing costs to €2.
New gross margin = €75 – €000 – €35 = €000.
With this decision, the gross margin would increase to €22.
-
Effect of a 15% increase in sales:
Increasing turnover by 15% would result in a turnover of €86.
New gross margin = €86 – €250 – €35 = €000.
The increase in sales increases the gross margin to €31, consolidating the profitability of operations. -
Long-term analysis of 5% per month increase in purchasing costs:
The continued increase in purchasing costs would weigh significantly on the gross margin, threatening the sustainability of the store if no action is taken to compensate for these increases, such as price adjustments or logistics optimizations.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross production margin | Sales excluding VAT – Cost of purchasing goods – General expenses |
| Gross margin rate | (Gross production margin ÷ Net sales) x 100 |
| New gross margin | New turnover – Costs – Expenses |
Application: InnovTech Services
States :
InnovTech Services offers innovative SaaS (software as a service) solutions for businesses. In January, its turnover excluding tax was €200. Development costs were €000, and software maintenance costs amounted to €70. The company wants to assess its gross production margin to decide on future technological investments.
Work to do :
- Evaluate the gross production margin for January.
- Calculate the gross margin rate and discuss its strategic importance.
- Project the effect of a 10% reduction in development costs on gross margin.
- If InnovTech wants to increase its maintenance investments by 20%, what impact will this have on the gross margin?
- Suggest ways to improve gross margin without increasing sales.
Proposed correction:
-
Gross production margin assessment:
To determine the gross margin, subtract development costs and maintenance costs from net sales.
Gross production margin = Net sales – Development costs – Maintenance costs
Gross production margin = €200 – €000 – €70 = €000.
The gross margin for January is €80. -
Calculation of gross margin rate:
The gross margin rate is identified by dividing the gross margin by the revenue, multiplied by 100.
Gross margin rate = (Gross production margin ÷ Net sales) x 100
Gross margin rate = (€80 ÷ €000) x 200 = 000%.
The gross margin rate of 40% reflects stable profitability, essential to finance continued innovation. -
Effect of a 10% reduction in development costs:
A 10% reduction in development costs would reduce these costs to €63.
New gross margin = €200 – €000 – €63 = €000.
With such a reduction, the gross margin would be €87, thus increasing profitability.
-
Impact of a 20% increase in maintenance costs:
A 20% increase would bring maintenance costs to €60.
New gross margin = €200 – €000 – €70 = €000.
Investment in maintenance would reduce gross margin to €70, posing challenges to maintain margin. -
Suggestions to improve gross margin:
To improve gross margin without increasing sales, InnovTech could consider automating certain maintenance or development processes to reduce costs, or renegotiating its supplier contracts to benefit from better rates.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross production margin | Turnover excluding tax – Development costs – Maintenance costs |
| Gross margin rate | (Gross production margin ÷ Net sales) x 100 |
| New gross margin | Revenue – New expenses – Costs |
Application: Prestissimo School
States :
Prestissimo School, which specializes in teaching music to children and adults, billed a total of €15 excluding VAT in February for its courses. Teachers' salaries amounted to €000, and other operating expenses amounted to €10. The management would like to know the gross production margin to decide on a possible expansion of the activities.
Work to do :
- Determine the gross production margin for February.
- Calculate the gross margin rate and indicate its importance for future development.
- Simulate a 5% drop in wages and assess the impact on gross margin.
- Consider a situation where operating expenses increase by 15%. What will be the effect on gross margin?
- Discuss what steps École Prestissimo can take to increase gross margin without reducing salaries.
Proposed correction:
-
Determination of gross production margin:
Let's calculate the gross margin by subtracting salaries and other expenses from the net sales.
Gross production margin = Net sales – Salaries – Operating expenses
Gross production margin = €15 – €000 – €10 = €000.
The gross margin for February stands at €2. -
Calculation of gross margin rate:
The gross margin rate is obtained by dividing the gross margin by the turnover, multiplied by 100.
Gross margin rate = (Gross production margin ÷ Net sales) x 100
Gross margin rate = (€2 ÷ €500) x 15 = 000%.
A rate of 16,67% helps to assess the room for maneuver to possibly develop new initiatives. -
Impact of a 5% drop in wages:
A 5% cut in wages would represent a reduction of €500, bringing wages to €9.
New gross margin = €15 – €000 – €9 = €500.
The gross margin would increase to €3 following this cost reduction.
-
Impact of the 15% increase in operating expenses:
A 15% increase would increase expenditure by €375, bringing total costs to €2.
New gross margin = €15 – €000 – €10 = €000.
Such an increase in expenses would reduce the initial potential gross margin to €2. -
Strategies to increase gross margin without touching salaries:
Prestissimo School may consider expanding its online course offering to attract a greater number of students without proportionally increasing costs, or improving the management of fixed costs through energy savings or collective purchases.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross production margin | Turnover excluding tax – Salaries – Operating expenses |
| Gross margin rate | (Gross production margin ÷ Net sales) x 100 |
| New gross margin | Revenue – Adjusted costs – Operating expenses |
Application: Active Athlete
States :
Sportif Actif, a company specializing in the manufacture of sports equipment, recorded a turnover excluding tax of €500 in March. Production costs were €000, while distribution costs amounted to €325. The company wants to calculate its gross production margin to optimize its operations.
Work to do :
- Calculate the gross production margin for the month of March.
- Calculate gross margin rate and discuss its use to improve costs.
- Imagine a 10% reduction in production costs, what would the new gross margin level be?
- Analyze the implications of a 20% increase in distribution costs.
- Suggest measures to improve gross margin without increasing revenue.
Proposed correction:
-
Calculation of gross production margin:
Gross margin is derived by subtracting production costs and distribution costs from net sales.
Gross production margin = Net sales – Production costs – Distribution costs
Gross production margin = €500 – €000 – €325 = €000.
Sportif Actif has a gross margin of €125 in March. -
Calculation of gross margin rate:
This is done by dividing gross margin by revenue and multiplying by 100.
Gross margin rate = (Gross production margin ÷ Net sales) x 100
Gross margin rate = (€125 ÷ €000) x 500 = 000%.
The 25% rate indicates a respectable margin, but invites possible improvements in cost management. -
Effect of a 10% reduction in production costs:
Reducing production costs by 10% lowers costs to €292.
New gross margin = €500 – €000 – €292 = €500.
With this reduction, the gross margin would amount to €157.
-
Implication of the 20% increase in distribution costs:
A 20% increase would affect distribution costs by €10, resulting in total costs of €000.
New gross margin = €500 – €000 – €325 = €000.
This growth would reduce the gross margin to €115, arguing for better control. -
Suggestions to improve gross margin:
Sportif Actif may consider streamlining its supply by using bundled offers on its materials or compressing internal logistics costs.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross production margin | Turnover excluding tax – Production costs – Distribution costs |
| Gross margin rate | (Gross production margin ÷ Net sales) x 100 |
| New gross margin | Revenue – Adjusted costs – Distribution costs. |
Application: Velolibrobatics
States :
Vélolibrobatique, a startup selling innovative stunt bikes, had a turnover of €400 excluding VAT for the month of April. The manufacturing costs of the bikes amounted to €000 and the marketing expenses to €160. The company is looking to evaluate its gross production margin to adjust its future marketing campaigns.
Work to do :
- Calculate the gross production margin for April.
- Calculate the gross margin rate to assess the profitability of the month.
- Consider a 5% decrease in manufacturing costs, how does this impact gross margin?
- What is the impact on gross margin if marketing expenses increase by 15%?
- Provide suggestions to improve gross margin without decreasing the marketing budget.
Proposed correction:
-
Calculation of gross production margin:
Let's subtract manufacturing costs and marketing expenses from net sales.
Gross production margin = Net sales – Manufacturing costs – Marketing expenses
Gross production margin = €400 – €000 – €160 = €000.
The gross production margin for April is €150. -
Calculation of gross margin rate:
The calculation is obtained by dividing the gross margin by the turnover, multiplied by 100.
Gross margin rate = (Gross production margin ÷ Net sales) x 100
Gross margin rate = (€150 ÷ €000) x 400 = 000%.
A gross margin rate of 37,5% is an encouraging performance for a startup. -
Influence of a 5% decrease in manufacturing costs:
A 5% reduction would reduce the costs to €152.
New gross margin = €400 – €000 – €152 = €000.
This reduction would increase the gross margin to €158.
-
Impact of 15% increase in marketing spend:
A 15% increase would see marketing spend increase by €13, totalling €500.
New gross margin = €400 – €000 – €160 = €000.
This would reduce the gross margin to €136, requiring some consideration. -
Suggestions for improving gross margin:
Vélolibrobatique can invest in technology to optimize manufacturing, reduce costs and increase production, but also explore commercial levers such as expanding the partner network with reciprocity.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross production margin | Turnover excluding tax – Manufacturing costs – Marketing expenses |
| Gross margin rate | (Gross production margin ÷ Net sales) x 100 |
| New gross margin | Revenue – Adjusted costs – Mark expenses. |
Application: RelaxMax Hotel
States :
Hotel RelaxMax, located on the seafront, welcomed many holidaymakers in May, recording a turnover of €300 excluding VAT. Operating costs, including staff and maintenance, amounted to €000, and marketing expenses related to partnerships were €180. The hotel wants to know its gross production margin to prepare for the peak summer season.
Work to do :
- Estimate the gross production margin for May.
- Calculate the gross margin rate to interpret its profitability.
- Simulate a 10% improvement in revenue. What effect would this have on gross margin, if costs are fixed?
- What is the impact of a 20% increase in operating costs?
- Discuss ways to strengthen gross margin as we enter the summer season.
Proposed correction:
-
Gross production margin assessment:
Let's subtract operating costs and marketing expenses from net sales.
Gross production margin = Net sales – Operating costs – Marketing expenses
Gross production margin = €300 – €000 – €180 = €000.
In May, the gross margin was €90. -
Calculation of gross margin rate:
It is determined by dividing the gross margin by the turnover, multiplied by 100.
Gross margin rate = (Gross production margin ÷ Net sales) x 100
Gross margin rate = (€90 ÷ €000) x 300 = 000%.
A rate of 30% indicates a solid margin for the hotel sector. -
Effect of a 10% increase in turnover:
A 10% increase would bring turnover to €330.
New gross margin = €330 – €000 – €180 = €000.
With this growth, the gross margin would reach €120, a notable gain to maximize results.
-
Impact of a 20% increase in operating costs:
A 20% increase would raise costs to €216.
New gross margin = €300 – €000 – €216 = €000.
The gross margin reduced to €54 directly impacts profitability, calling for vigilance in cost management. -
Ways to increase gross margin:
RelaxMax can move towards premium offers that capture customers during peak times or diversify its services with additional benefits to increase the average ticket per customer.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross production margin | Turnover excluding tax – Operating costs – Marketing expenses |
| Gross margin rate | (Gross production margin ÷ Net sales) x 100 |
| New gross margin | New Revenue – Fixed Costs – Fixed Expenses |