In this section:
Application: Chic & Choc Boutique
States :
The boutique "Chic & Choc", specializing in the sale of high-end clothing, wants to analyze its financial performance to better understand its profitability. Currently, the data shows that the turnover for the month amounts to €80, with a cost of goods sold of €000. Management wants to understand the gross margin in percentage to make strategic adjustments.
Work to do :
- Calculate the gross margin by amount for “Chic & Choc”.
- Determine the gross margin as a percentage.
- If the store wants to increase its gross margin by 5%, what should the cost of goods sold be, at constant revenue?
- Interpret what it means for “Chic & Choc” to achieve a gross margin of 40%.
- Recommend a strategy to improve gross margin percentage while limiting the impact on sales.
Proposed correction:
-
Gross margin in amount is calculated by subtracting cost of goods sold from revenue.
Gross margin = Revenue – Cost of goods sold = €80 – €000 = €48.
Thus, the gross margin of “Chic & Choc” is €32. -
Gross margin percentage is calculated by dividing gross margin by revenue and then multiplying by 100.
Gross margin in % = (Gross margin ÷ Turnover) x 100 = (€32 ÷ €000) x 80 = 000%.
The gross margin of “Chic & Choc” is thus 40%. -
To increase the gross margin by 5%, i.e. to 45%, we use the following formula:
Target gross margin in amount = Turnover x new margin percentage = €80 x 000 = €0,45.
New cost of goods sold = Revenue – new gross margin = €80 – €000 = €36.
For a constant turnover, the cost of goods will have to be reduced to €44.
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Achieving a 40% gross margin means that 40% of the revenue remains in the store after paying the direct costs of the products sold. This provides a good margin to cover other expenses and generate a profit.
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To improve gross margin, the store could negotiate better prices from suppliers or introduce higher value-added products to sell at higher prices, while maintaining customer appeal.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Revenue – Cost of goods sold |
| Gross margin in % | (Gross margin ÷ Turnover) x 100 |
| Target gross margin | Revenue x new margin percentage |
| New cost of goods | Turnover – new gross margin |
Application: ElectroGalaxy
States :
ElectroGalaxy, a store specializing in electronic devices, has observed that its monthly sales have reached €150, with a total cost for the purchase of these devices of €000. The management wants to know if their financial performance is competitive in the market by analyzing the gross margin in percentage.
Work to do :
- Calculate the amount of gross margin earned by ElectroGalaxy.
- Determine the gross margin as a percentage.
- If ElectroGalaxy wants to reduce the purchase cost by 10%, what would be the impact on the gross margin in percentage?
- Evaluate why it is essential to maintain a high gross margin in the electronics industry.
- Identify a strategic option to improve gross margin without decreasing the quantity of products sold.
Proposed correction:
-
Gross margin is obtained by subtracting the cost of purchase from the turnover.
Gross margin = Sales revenue – Purchase cost = €150 – €000 = €90.
Thus, ElectroGalaxy's gross margin is €60. -
To find the gross margin as a percentage, divide the gross margin by the revenue, then multiply by 100.
Gross margin in % = (Gross margin ÷ Turnover) x 100 = (€60 ÷ €000) x 150 = 000%.
ElectroGalaxy therefore has a gross margin of 40%. -
Reducing the purchase cost by 10% means that the cost goes from €90 to €000 x 90 = €000.
New gross margin = Revenue – new purchase cost = €150 – €000 = €81.
New gross margin in % = (€69 ÷ €000) x 150 = 000%.
Reducing purchasing costs would increase gross margin to 46%.
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In electronics, where trends change rapidly, a high gross margin helps absorb cost fluctuations and invest in innovation to maintain competitiveness.
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To improve gross margin, ElectroGalaxy could introduce a range of exclusive products with more attractive prices or launch associated services, such as extended warranties, without reducing the quantity of products sold.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Sales revenue – Purchase cost |
| Gross margin in % | (Gross margin ÷ Turnover) x 100 |
| New purchase cost | Purchase cost x (1 – % discount) |
| New gross margin | Sales revenue – new purchase cost |
| New gross margin in % | (New gross margin ÷ Revenue) x 100 |
Application: Local Delicacies
States :
Gourmandises du Terroir is a small business that produces and sells regional artisanal products. In the last quarter, the business generated a turnover of €30, and the cost of raw materials used was €000. The manager wants to know how this translates into gross margin percentage in order to identify areas for improvement.
Work to do :
- Identify the total amount of gross margin generated this quarter by Gourmandises du Terroir.
- Calculate the gross margin as a percentage.
- If the company increased its prices by 10% while keeping costs constant, what would the new gross margin be as a percentage?
- Analyze the impact of a low gross margin on the company's operations.
- Propose a solution to increase gross margin while maintaining high customer satisfaction.
Proposed correction:
-
Gross margin is calculated by subtracting the cost of raw materials from sales.
Gross margin = Revenue – Cost of raw materials = €30 – €000 = €14.
So the gross margin for this quarter is €16. -
Gross margin percentage is determined by dividing gross margin by revenue and multiplying by 100.
Gross margin in % = (Gross margin ÷ Turnover) x 100 = (€16 ÷ €000) x 30 = 000%.
The gross margin as a percentage is therefore 53,33%. -
A 10% price increase results in new revenue of €30 x 000 = €1,1.
Newly calculated, gross margin = Increased turnover – Cost = €33 – €000 = €14.
New gross margin in % = (€19 ÷ €000) x 33 = 000%.
With this pricing strategy, the gross margin would reach 57,58%.
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A gross margin that is too low could limit the company's ability to cover its fixed costs and invest in its development, exposing Gourmandises du Terroir to financial risks.
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To increase gross margin while keeping customers satisfied, the company could focus on product diversification or implementing loyalty programs that increase the average basket.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Turnover – Cost of raw materials |
| Gross margin in % | (Gross margin ÷ Turnover) x 100 |
| New turnover | Turnover x (1 + % increase) |
| New gross margin | New revenue – Cost of raw materials |
| New gross margin in % | (New gross margin ÷ New turnover) x 100 |
Application: EcoTech Solutions
States :
EcoTech Solutions, an innovative company in renewable energy solutions, generated a turnover of €500 last year. The cost of operations, including the purchase of components, was €000. The management wants to analyze this performance to assess its competitive position.
Work to do :
- Calculate the gross margin achieved by EcoTech Solutions.
- Express gross margin as a percentage of total revenue.
- Assuming a 15% increase in sales with costs increasing by 8%, calculate the new gross margin as a percentage.
- Discuss the role of gross margin in strategic decisions for EcoTech Solutions.
- Suggest an approach to increase gross margin within the renewable energy sector.
Proposed correction:
-
Gross margin is obtained by subtracting the cost of operations from revenue.
Gross margin = Revenue – Cost of operations = €500 – €000 = €320.
This gross margin therefore amounts to €180. -
To get gross margin as a percentage, divide gross margin by revenue and multiply by 100.
Gross margin in % = (Gross margin ÷ Turnover) x 100 = (€180 ÷ €000) x 500 = 000%.
The gross margin as a percentage is therefore 36%. -
By increasing sales by 15%, the turnover becomes €500 x 000 = €1,15.
With an 8% increase in costs, these become €320 x 000 = €1,08.
New gross margin = €575 – €000 = €345.
New gross margin in % = (€229 ÷ €400) x 575 = 000%.
The new gross margin would therefore be 39,9%.
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Gross margin is a key profitability indicator, allowing EcoTech to plan investments, assess margin for R&D and reduce financial risks.
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To increase gross margin, the company can invest in technologies that reduce production costs or diversify its product portfolio to include higher-margin offerings.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Turnover – Cost of operations |
| Gross margin in % | (Gross margin ÷ Turnover) x 100 |
| New turnover | Revenue x (1 + % increase in sales) |
| New costs | Cost of operations x (1 + % increase in costs) |
| New gross margin | New revenue – New costs |
| New gross margin in % | (New gross margin ÷ New turnover) x 100 |
Application: Village Bakery
States :
Boulangerie du Village is known for its artisan breads. This month, it had a turnover of €20 with a raw material cost of €000. The owner wants to understand the performance by calculating the gross margin as a percentage.
Work to do :
- Calculate the amount of gross margin generated by the bakery.
- Express the gross margin obtained as a percentage.
- If prices increase by 5% with cost remaining constant, what will be the new gross margin as a percentage?
- Discuss the implications of a high gross margin on bakery operations.
- Suggest a technique to increase gross margin without sacrificing product quality.
Proposed correction:
-
Gross margin is calculated by subtracting the cost of raw materials from sales revenue.
Gross margin = Revenue – Cost of raw materials = €20 – €000 = €8.
So the gross margin is €12. -
Gross margin percentage is obtained by dividing gross margin by revenue and then multiplying by 100.
Gross margin in % = (Gross margin ÷ Turnover) x 100 = (€12 ÷ €000) x 20 = 000%.
The gross margin of the bakery is therefore 60%. -
With a 5% price increase, the new turnover becomes €20 x 000 = €1,05.
The new gross margin = €21 – €000 = €8.
New gross margin in % = (€13 ÷ €000) x 21 = 000%.
With the price increase, the new gross margin would be 61,9%.
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A high gross margin provides greater flexibility to invest in product quality, innovate and weather economic fluctuations.
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Improving gross margin without sacrificing quality can be done by optimizing production processes or negotiating better prices for raw materials.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Turnover – Cost of raw materials |
| Gross margin in % | (Gross margin ÷ Turnover) x 100 |
| New turnover | Turnover x (1 + % increase) |
| New gross margin | New revenue – Cost of raw materials |
| New gross margin in % | (New gross margin ÷ New turnover) x 100 |
Application: AutoRepair Pro
States :
AutoRepair Pro, a car repair shop, has generated €75 in revenue this quarter from vehicle repairs. Parts and labor costs amount to €000. The manager is looking to analyze the gross margin as a percentage.
Work to do :
- Determine the amount of gross margin generated by AutoRepair Pro.
- Express the gross margin obtained as a percentage of turnover.
- If the garage could reduce its costs this time by 10%, calculate the new gross margin as a percentage.
- Evaluate the importance of a healthy gross margin in the auto repair industry.
- Recommend an approach to optimize gross margin while increasing customer satisfaction.
Proposed correction:
-
Gross margin is calculated by subtracting parts and labor costs from revenue.
Gross margin = Revenue – Total costs = €75 – €000 = €45.
So the gross margin is €30. -
Gross margin percentage is calculated by dividing gross margin by revenue and multiplying by 100.
Gross margin in % = (Gross margin ÷ Turnover) x 100 = (€30 ÷ €000) x 75 = 000%.
The gross margin is 40%. -
With a 10% cost reduction, the new cost = €45 x 000 = €0,90.
The new gross margin = €75 – €000 = €40.
New gross margin in % = (€34 ÷ €500) x 75 = 000%.
With reduced costs, the new gross margin would be 46%.
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A healthy gross margin is crucial to maintaining quality service, absorbing unexpected costs and investing in recent equipment in an auto repair shop.
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To optimize gross margin while increasing customer satisfaction, AutoRepair Pro can focus on staff training to increase efficiency and reduce unnecessary labor time, thereby increasing repair yield.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Revenue – Total costs |
| Gross margin in % | (Gross margin ÷ Turnover) x 100 |
| New total cost | Total costs x (1 – % reduction) |
| New gross margin | Revenue – New Total Cost |
| New gross margin in % | (New gross margin ÷ Revenue) x 100 |
Application: Academic Bookstore
States :
The Academic Bookstore recently sold €40 worth of school and university books. The cost of inventory and distribution costs is €000. Management wants to know the financial performance through the gross margin as a percentage.
Work to do :
- Calculate the gross margin that the Academic Bookstore makes.
- Determine the gross margin as a percentage of these sales.
- If the cost of inventory decreases by €2, what will the new gross margin be as a percentage?
- Comment on the impact of a high gross margin for the Bookstore in the context of a competitive industry.
- Suggest a method to improve gross margin while keeping prices attractive.
Proposed correction:
-
Gross margin is calculated by subtracting the cost of inventory and distribution expenses from sales.
Gross margin = Revenue – Total cost = €40 – €000 = €25.
So the gross margin is €15. -
Gross margin percentage is obtained by dividing gross margin by revenue and then multiplying by 100.
Gross margin in % = (Gross margin ÷ Turnover) x 100 = (€15 ÷ €000) x 40 = 000%.
The gross margin is 37,5%. -
If the inventory cost decreases by €2, then the new total cost is €000 – €25 = €000.
The new gross margin = €40 – €000 = €23.
New gross margin in % = (€17 ÷ €000) x 40 = 000%.
With the cost reduction, the new gross margin would be 42,5%.
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A high gross margin allows the Bookstore to be more flexible in its promotions, invest in cultural events and offer improved customer service, which is advantageous in a competitive market.
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To improve gross margin, while keeping prices attractive, the Bookstore can negotiate volume discounts with publishers, thereby reducing purchasing costs.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Revenue – Total cost |
| Gross margin in % | (Gross margin ÷ Turnover) x 100 |
| New total cost | Original total cost – decrease in € |
| New gross margin | Revenue – New Total Cost |
| New gross margin in % | (New gross margin ÷ Revenue) x 100 |
Application: DevAppAgency
States :
DevAppAgency develops applications for various companies. Recently, they made a turnover of €200, while the costs incurred for the projects include €000 for salaries and equipment. The team wants to know the gross margin in percentage to adjust their business strategy.
Work to do :
- Identify the amount of gross margin earned by DevAppAgency.
- Calculate gross margin as a percentage of total revenue.
- If costs were reduced by 5%, what would the new gross margin be as a percentage?
- Discuss the business benefits of maintaining a strong gross margin in the application development industry.
- Recommend a strategy for DevAppAgency to increase its gross margin without increasing labor costs.
Proposed correction:
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Gross margin is obtained by subtracting project costs from revenue.
Gross margin = Revenue – Project costs = €200 – €000 = €130.
DevAppAgency achieves a gross margin of €70. -
Gross margin percentage is calculated by dividing gross margin by revenue and multiplying by 100.
Gross margin in % = (Gross margin ÷ Turnover) x 100 = (€70 ÷ €000) x 200 = 000%.
So the gross margin is 35%. -
If costs are reduced by 5%, the new costs are €130 x 000 = €0,95.
The new gross margin = €200 – €000 = €123.
New gross margin in % = (€76 ÷ €500) x 200 = 000%.
With reduced costs, the gross margin is 38,25%.
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Strong gross margins make it easier for DevAppAgency to reinvest in training, product innovation and expansion to remain competitive.
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To increase gross margin without impacting labor costs, DevAppAgency could integrate new technologies or more efficient working methods, thereby increasing productivity.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Revenue – Project costs |
| Gross margin in % | (Gross margin ÷ Turnover) x 100 |
| New project costs | Project costs x (1 – % reduction) |
| New gross margin | Revenue – New Project Costs |
| New gross margin in % | (New gross margin ÷ Revenue) x 100 |
Application: StudioGraph
States :
StudioGraph, a graphic design agency, generated revenue of €100 in the last half-year. Overhead expenses, including rental and supplies, amount to €000. The art director wants to determine the agency's performance in terms of gross margin percentage.
Work to do :
- Determine the gross margin amount for StudioGraph.
- Calculate the gross margin as a percentage of this total sales.
- If revenue increases by 20% and costs increase by 10%, what will the gross margin be as a percentage?
- Evaluate the importance of a high gross margin in the graphic design industry.
- Suggest a strategy to improve gross margin while diversifying the service offering.
Proposed correction:
-
Gross margin is calculated by subtracting overheads from revenue.
Gross margin = Revenue – Overheads = €100 – €000 = €50.
The gross margin is therefore €50. -
Gross margin percentage is calculated by dividing gross margin by revenue and multiplying by 100.
Gross margin in % = (Gross margin ÷ Turnover) x 100 = (€50 ÷ €000) x 100 = 000%.
StudioGraph's gross margin is 50%. -
If turnover increases by 20%, new turnover = €100 x 000 = €1,2.
With a 10% increase in costs, new costs = €50 x 000 = €1,1.
New gross margin = €120 – €000 = €55.
New gross margin in % = (€65 ÷ €000) x 120 = 000%.
Thus, the new gross margin would be 54,17%.
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A high gross margin in graphic design allows for investments in better tools, training for designers, and an expanded offering to attract more clients.
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To improve gross margin while diversifying the offering, StudioGraph can expand its services by offering digital marketing consulting, thus capturing a wider market while optimizing the use of current resources.
Formulas Used:
| Title | Formulas |
|---|---|
| Gross margin | Turnover – General expenses |
| Gross margin in % | (Gross margin ÷ Turnover) x 100 |
| New turnover | Turnover x (1 + % increase) |
| New overheads | Overhead x (1 + % increase) |
| New gross margin | New Revenue – New Overhead Costs |
| New gross margin in % | (New gross margin ÷ New turnover) x 100 |