How-to-calculate-a-company's-gross-margin

How to Calculate a Company's Gross Margin | 9 Exercises

by

Application: Sweet Pastry Delights

States :

Pâtisserie Sucrée Délices, located in the heart of Lyon, is known for its delicious artisanal pastries. During the month of March, it sold a total of 3 croissants for a unit sale price of €000 excluding VAT each. The cost of purchasing the ingredients for a croissant is €1,80 excluding VAT.

Work to do :

  1. Calculate the unit margin made on each croissant.
  2. Determine the company's overall margin for the month of March.
  3. Calculate the markup rate of the croissants sold.
  4. assess the impact on total margin if ingredient costs increased by 10%.
  5. Discuss the importance of calculating gross margin in the restaurant industry.

Proposed correction:

  1. The unit margin is calculated by subtracting the pre-tax purchase cost from the pre-tax sale price: €1,80 – €0,70 = €1,10. The unit margin is €1,10 per croissant.

  2. The overall margin is calculated by multiplying the unit margin by the quantity sold: €1,10 x 3 = €000. The overall margin for the month of March is €3.

  3. For the markup rate, we use the formula: ((PV HT – PA HT) ÷ PV HT) x 100. So, ((€1,80 – €0,70) ÷ €1,80) x 100 = 61,11%. The markup rate for croissants is 61,11%.

  1. If the cost of ingredients increases by 10%, the new cost would be €0,70 x €1,10 = €0,77. The new unit margin would be €1,80 – €0,77 = €1,03. The new overall margin would be €1,03 x 3 = €000. The impact would be a reduction in the overall margin to €3, a decrease of €090.

  2. Gross margin is crucial in the restaurant industry because it helps measure product profitability, assess cost efficiency, and aid in determining selling prices.

Formulas Used:

Title Formulas
Unit margin PV HT – PA HT
Overall margin Unit margin x quantity sold
Brand taxes ((PV HT – PA HT) ÷ PV HT) x 100
Impact on overall margin (PV HT – New PA HT) x quantity sold

Application: TechGear Solutions

States :

TechGear Solutions, a manufacturer of innovative electronic gadgets, has sold 500 units of its new smartwatch model during a quarter. The retail price of a watch is €250 excluding VAT and the production cost is €150 excluding VAT per unit.

Work to do :

  1. What is the net margin for a smartwatch sold?
  2. Calculate the total gross margin for this quarter.
  3. Determine the margin rate achieved per unit.
  4. Imagine that the company decides to reduce the production cost by €10, what would be the impact on the total quarterly gross margin?
  5. Discuss the need for effective management of production costs in the technology industry.

Proposed correction:

  1. The net margin per smartwatch is obtained by subtracting the production cost excluding VAT from the selling price excluding VAT: €250 – €150 = €100. The net margin per watch is €100.

  2. Total gross margin is calculated by multiplying net margin by the number of units sold: €100 x 500 = €50. Total gross margin for the quarter is €000.

  3. For the margin rate, it is ((PV HT – PA HT) ÷ PA HT) x 100. So, ((250 € – 150 €) ÷ 150 €) x 100 = 66,67%. The margin rate per unit is 66,67%.

  1. If the cost of production is reduced by €10, the new cost would be €150 – €10 = €140. The new gross margin per unit would be €250 – €140 = €110. The new total gross margin would be €110 x 500 = €55. The impact is an increase in the total gross margin to €000, an increase of €55.

  2. Effective management of production costs is essential to ensure competitiveness in the technology industry and maximize profit margins.

Formulas Used:

Title Formulas
Net margin per unit PV HT – PA HT
Total gross margin Net margin x number of units sold
Margin rate per unit ((PV HT – PA HT) ÷ PA HT) x 100
Impact on total gross margin (PV HT – New PA HT) x number of units

Application: GreenGarden Landscaper

States :

GreenGarden Landscaper is a local company specialising in garden maintenance and landscaping. In the last month they have invoiced €2000 for a large garden landscaping project, with direct costs of €1 in materials and labour.

Work to do :

  1. Calculate the gross margin made on this garden project.
  2. What is the margin rate for this project?
  3. If the next similar project gets a 10% discount to retain the customer, what will be the new invoice amount and the new gross margin?
  4. Consider how a 5% increase in costs would affect gross margin.
  5. Explain how gross margin influences GreenGarden's strategic planning.

Proposed correction:

  1. The gross margin is obtained by subtracting the costs from the invoiced amount: €2 – €000 = €1. The gross margin achieved is €200.

  2. The margin rate is ((Amount Billed – Cost) ÷ Cost) x 100. So, ((€2 – €000) ÷ €1) x 200 = 1%. The margin rate is 200%.

  3. With a 10% discount, the new invoiced amount is €2 x 000 = €0,90. The new gross margin is €1 – €800 = €1. The discount reduces the gross margin to €800.

  1. With a 5% increase in costs, the new cost would be €1 x 200 = €1,05. The new gross margin is €1 – €260 = €2. The increase in costs reduces the gross margin to €000.

  2. Gross margin is a key indicator for strategic planning because it affects profitability, influences the ability to invest and grow.

Formulas Used:

Title Formulas
Gross margin Amount billed – Cost
Margin rate ((Amount Billed – Cost) ÷ Cost) x 100
New amount billed Initial amount x (1 – Discount rate)
New gross margin New Amount Billed – Cost
Gross margin after increase Amount billed – New cost

Application: FitWear Inc.

States :

FitWear Inc., a fashion company, designs and sells sportswear. Last month, it sold 1 pairs of leggings at a unit price of €200 excluding VAT. The production cost is €50 excluding VAT per unit.

Work to do :

  1. What is the gross margin per unit for each legging?
  2. Calculate the total gross margin achieved for the past month.
  3. Determine the markup rate for each legging sold.
  4. If the cost of production is reduced by 15%, how will this affect the total gross margin?
  5. Consider how gross margin influences pricing strategy at FitWear Inc.

Proposed correction:

  1. The gross margin per unit is calculated by subtracting the production cost excluding tax from the selling price excluding tax: €50 – €30 = €20. The gross margin per unit is €20.

  2. The total gross margin is calculated by multiplying the unit gross margin by the quantity sold: €20 x 1 = €200. The total gross margin for the past month is €24.

  3. The markup rate is calculated with the formula: ((PV HT – PA HT) ÷ PV HT) x 100. Therefore, ((50 € – 30 €) ÷ 50 €) x 100 = 40%. The markup rate per legging is 40%.

  1. With a 15% reduction in production cost, the new cost is €30 x 0,85 = €25,50. The new gross margin per unit is €50 – €25,50 = €24,50. The new total gross margin is €24,50 x 1 = €200. This increases the total gross margin by €29.

  2. Gross margin directly influences pricing strategy because it must cover fixed costs, influence price competitiveness and brand image.

Formulas Used:

Title Formulas
Unit gross margin PV HT – PA HT
Total gross margin Gross margin per unit x quantity sold
Brand taxes ((PV HT – PA HT) ÷ PV HT) x 100
New production cost Initial cost x (1 – Discount rate)
New total gross margin New gross margin per unit x quantity sold

Application: BioMarket Grocery Store

States :

BioMarket Épicerie, a brand specializing in organic products, sold 800 units of cereals in July at a selling price of €5 per unit excluding VAT. The purchase cost for each packet of cereals is €3,50 excluding VAT.

Work to do :

  1. Determine the gross margin per package of cereal sold.
  2. Calculate the cumulative margin for all grain sales in July.
  3. What is the markup percentage?
  4. Evaluate the effects of increasing the selling price to €5,50 on the total gross margin.
  5. Discuss the impact of margins on the company's promotional policies.

Proposed correction:

  1. The gross margin per pack is determined by subtracting the cost excluding tax from the selling price excluding tax: €5 – €3,50 = €1,50. The gross margin per pack of cereal is €1,50.

  2. The cumulative margin is the product of the unit gross margin and the number of units sold: €1,50 x 800 = €1. The cumulative margin for all sales in July is €200.

  3. To calculate the markup rate: ((PV HT – PA HT) ÷ PV HT) x 100, which gives ((€5 – €3,50) ÷ €5) x 100 = 30%. The markup rate is 30%.

  1. With a new selling price of €5,50, the gross margin per unit becomes €5,50 – €3,50 = €2. The new total gross margin is €2 x 800 = €1. Changing the selling price would increase the total gross margin to €600, adding an additional €1.

  2. Margins affect promotion policies because they determine the flexibility in granting discounts while maintaining profitability.

Formulas Used:

Title Formulas
Unit gross margin PV HT – PA HT
Cumulative margin Gross margin per unit x number of units sold
Brand taxes ((PV HT – PA HT) ÷ PV HT) x 100
New gross margin per unit New PV HT – PA HT
New total gross margin New gross margin per unit x number of units

Application: MediCare Services

States :

MediCare Services, a healthcare company, offers consultation packages for €150 excluding VAT. The cost of associated operations is €90 excluding VAT per package. Last month, the company sold 400 packages.

Work to do :

  1. Calculate the gross margin for each package sold.
  2. Determine the total gross margin for the last month.
  3. What is the margin rate on each package?
  4. If MediCare decided to reduce the selling price by €10, what would be the effect on the total gross margin?
  5. Analyze the importance of gross margin in improving MediCare services.

Proposed correction:

  1. The gross margin per package is calculated by subtracting the operating cost excluding tax from the selling price excluding tax: €150 – €90 = €60. The gross margin per package sold is €60.

  2. The total gross margin is obtained by multiplying the unit gross margin by the number of packages sold: €60 x 400 = €24. The total gross margin for the last month is €000.

  3. The margin rate is calculated with the formula ((PV HT – PA HT) ÷ PA HT) x 100, or ((150 € – 90 €) ÷ 90 €) x 100 = 66,67%. The margin rate on each package is 66,67%.

  1. With a €10 discount on the sales price: New PV excluding VAT = €150 – €10 = €140. The new margin per package would be €140 – €90 = €50. The new total margin is €50 x 400 = €20. Such a discount would reduce the total margin to €000, a decrease of €20.

  2. Gross margin helps MediCare invest in service improvements and is essential for financial sustainability when prices must remain reasonable.

Formulas Used:

Title Formulas
Gross margin per package PV HT – PA HT
Total gross margin Gross margin per unit x number of packages sold
Margin rate ((PV HT – PA HT) ÷ PA HT) x 100
New PV HT PV HT – Reduction
New total margin New margin x number of packages

Application: EcoDecor Artisans

States :

EcoDecor Artisans is a company that manufactures eco-friendly decorative objects. In the last quarter, it sold 1 pieces of lamp for a unit price of €500 excluding VAT. The manufacturing cost is €75 excluding VAT per unit.

Work to do :

  1. Calculate the gross margin for each lamp sold.
  2. What is the total quarterly gross margin?
  3. Calculate the mark rate per lamp.
  4. Analyze the impact of a 5% increase in manufacturing costs on gross margin.
  5. Consider the impact on business strategy if the company increases its prices by €10 per unit.

Proposed correction:

  1. Gross margin per lamp = PV excluding VAT – PA excluding VAT, therefore €75 – €45 = €30. Each lamp sold generates a gross margin of €30.

  2. Total gross margin = Unit margin x quantity sold, €30 x 1 = €500. The total gross margin for the last quarter is €45.

  3. The markup rate is ((PV HT – PA HT) ÷ PV HT) x 100, or ((75 € – 45 €) ÷ 75 €) x 100 = 40%. The markup rate per lamp is 40%.

  1. Manufacturing cost increase of 5%: New cost = €45 x 1,05 = €47,25. New unit margin = €75 – €47,25 = €27,75. New total margin = €27,75 x 1 = €500. The increase in costs reduces the total gross margin to €41, a decrease of €625.

  2. Price increase of €10 per lamp: New PV HT = €75 + €10 = €85, new margin = €85 – €45 = €40. New total margin = €40 x €1 = €500. Raising prices could significantly increase margins, but customer reaction needs to be assessed.

Formulas Used:

Title Formulas
Gross margin per lamp PV HT – PA HT
Total gross margin Unit margin x quantity sold
Brand taxes ((PV HT – PA HT) ÷ PV HT) x 100
New manufacturing cost Initial cost x (1 + Rate of increase)
New total margin New unit margin x quantity sold
New PV HT Initial PV excluding VAT + Price increase

Application: InnovKitchen Equipment

States :

InnovKitchen Equipements, specializing in high-tech kitchen appliances, sold 600 food processors at a price of €300 excluding VAT per unit in the last half-year. The production cost is €200 excluding VAT per appliance.

Work to do :

  1. What is the unit gross margin for each robot?
  2. Evaluate the half-yearly gross margin for sales made.
  3. Calculate the margin rate of each robot.
  4. If the production cost decreases by €20 per unit, what would be the impact on the total gross margin?
  5. Discuss the influence of high margins on product innovation at InnovKitchen.

Proposed correction:

  1. The gross margin per unit is given by: PV HT – PA HT, therefore €300 – €200 = €100. The gross margin per unit for each robot is €100.

  2. Half-yearly gross margin = Unit margin x number of units sold, i.e. €100 x 600 = €60. The half-yearly gross margin is €000.

  3. For the margin rate: ((PV HT – PA HT) ÷ PA HT) x 100 = ((300 € – 200 €) ÷ 200 €) x 100 = 50%. The margin rate of each robot is 50%.

  1. If the cost of production decreases by €20, the new cost is €200 – €20 = €180. The new unit margin becomes €300 – €180 = €120. New total margin = €120 x 600 = €72. The €000 decrease in cost increases the total gross margin by €20.

  2. High margins support innovation as the company can reinvest more in R&D, while ensuring increased competitiveness through distinctive products.

Formulas Used:

Title Formulas
Unit gross margin PV HT – PA HT
Half-yearly gross margin Unit margin x number of units sold
Margin rate ((PV HT – PA HT) ÷ PA HT) x 100
New production cost Initial Cost – Reduction
New total margin New unit margin x number of units sold

Application: AquaPure Systems

States :

AquaPure Systems, an innovative start-up in water filtration solutions, sold 350 filtration systems in the quarter for a selling price of €400 excluding VAT per unit. The cost price per system is €280 excluding VAT.

Work to do :

  1. Determine the gross margin per filtration system sold.
  2. Calculate the total gross margin for this quarter.
  3. What is the markup rate for each system?
  4. Imagine a 5% drop in sales price, analyze the impact on quarterly gross margin.
  5. Suggest strategies to improve margins at AquaPure.

Proposed correction:

  1. Gross margin per system = PV HT – PA HT, therefore €400 – €280 = €120. The gross margin per filtration system is €120.

  2. Total gross margin = Unit margin x number of units sold, €120 x 350 = €42. The total gross margin for this quarter is €000.

  3. The markup rate is calculated by ((PV HT – PA HT) ÷ PV HT) x 100, or ((€400 – €280) ÷ €400) x 100 = 30%. The markup rate is 30%.

  1. 5% drop in sales price: New PV excluding VAT = €400 x 0,95 = €380, new unit margin = €380 – €280 = €100. New total margin = €100 x 350 = €35. A price drop would reduce the total margin to €000, a decrease of €35.

  2. To improve margins, AquaPure could optimize the supply chain, promote energy efficiency or diversify the offering to take additional market share.

Formulas Used:

Title Formulas
Gross margin by system PV HT – PA HT
Total gross margin Unit margin x number of units sold
Brand taxes ((PV HT – PA HT) ÷ PV HT) x 100
New PV HT Initial PV x (1 – Drop Rate)
New total margin New unit margin x number of units

Leave comments