How-to-calculate-gross-margin-on-turnover

How to Calculate Gross Margin on Sales | 9 Exercises

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Application: Local Bakery

States :

Boulangerie du Terroir wants to optimize its sales by analyzing the gross margin made on turnover (TO). To do this, it has provided you with the following data for the past month: turnover excluding tax of €15, cost of raw materials of €000, and other direct costs amounting to €5.

Work to do :

  1. Calculate the gross margin of Boulangerie du Terroir.
  2. Determine the gross margin rate on sales.
  3. Compare the impact of a 10% increase in sales on gross margin, assuming costs remain constant.
  4. If the bakery increases its direct costs by €500, what would be the new gross margin rate?
  5. Discuss the importance of a high gross margin for the sustainability of the bakery.

Proposed correction:

  1. Gross margin is calculated by subtracting total direct costs from net sales.
    Gross margin = Net turnover – (Cost of raw materials + Other direct costs)
    Gross margin = €15 – (€000 + €5)
    Gross margin = €15 – €000 = €7
    The gross margin of Boulangerie du Terroir is therefore €8.

  2. Gross margin rate is calculated by dividing gross margin by revenue and then multiplying by 100 to get a percentage.
    Gross margin rate = (Gross margin ÷ Net sales) x 100
    Gross margin rate = (€8 ÷ €000) x 15 = 000%
    The gross margin rate on turnover is 53,33%.

  3. For a 10% increase in sales, the new turnover would be €16 (€500 + 15% of €000).

The gross margin would then be calculated with the revised turnover, but the same costs.
New gross margin = €16 – €500 = €7
Increasing sales by 10% would increase gross margin to €9, which represents an increase of €500.

  1. If direct costs increase by €500, the new costs would be €7.
    New gross margin = €15 – €000 = €7
    New gross margin rate = (€7 ÷ €500) x 15 = 000%
    With increasing costs, the gross margin rate would decrease to 50%.

  2. Gross margin is essential because it not only covers the fixed costs of the business, but also allows it to generate a profit. A high gross margin indicates an ability to generate profits even when sales or costs fluctuate, thus ensuring the sustainability of the Boulangerie du Terroir.

Formulas Used:

Title Formulas
Gross margin CA HT – (Cost of raw materials + Other direct costs)
Gross margin rate (Gross margin ÷ HT turnover) x 100

Application: Creative Sewing Workshop

States :

Atelier Couture Créatif, which specializes in custom clothing, is having difficulty aiming for a good gross margin rate. To rectify the situation, it wants to reassess its strategy based on the following elements: net sales of €25, fabric costs of €000, and other direct costs of €7.

Work to do :

  1. Determine the current gross margin of the Creative Couture Workshop.
  2. Calculate the gross margin rate on turnover.
  3. Estimate the effect of a 10% reduction in fabric costs on gross margin.
  4. Analyze how an increase in revenue of €5 would affect the margin rate, without changing costs.
  5. Explain why insufficient gross margin could pose operational risks to the business.

Proposed correction:

  1. Gross margin is obtained by subtracting total direct costs from net sales.
    Gross margin = Net turnover – (Cost of fabrics + Other direct costs)
    Gross margin = €25 – (€000 + €7)
    Gross margin = €25 – €000 = €11
    The Creative Couture Workshop has a gross margin of €14.

  2. The gross margin rate is found by dividing the gross margin by the net turnover and multiplying by 100.
    Gross margin rate = (Gross margin ÷ Net sales) x 100
    Gross margin rate = (€14 ÷ €000) x 25 = 000%
    The current gross margin rate is 56%.

  3. A 10% decrease in fabric costs is equivalent to a reduction of €750 (10% of €7).

New fabric costs = €7 – €500 = €750
New gross margin = €25 – (€000 + €6) = €750
Cost reduction improves gross margin to €14, an increase of €750.

  1. If turnover increases by €5, bringing net turnover to €000 without changing costs:
    New gross margin = €30 – €000 = €11
    New gross margin rate = (€19 ÷ €000) x 30 = 000%
    This increase in turnover leads to a better gross margin rate of 63,33%.

  2. An insufficient gross margin reduces the company's ability to invest in growth and exposes it to cash flow difficulties, especially during periods of low sales or in the event of an unforeseen increase in costs.

Formulas Used:

Title Formulas
Gross margin CA HT – (Cost of fabrics + Other direct costs)
Gross margin rate (Gross margin ÷ HT turnover) x 100

Application: Healthy Snack

States :

Le Snack Santé, an eco-friendly fast food company, is looking to maximize its profitability. Here are the figures for the last quarter: net sales of €40, ingredient expenses of €000, and other direct costs of €18.

Work to do :

  1. Calculate the gross margin of the Healthy Snack.
  2. Evaluate the gross margin rate on turnover.
  3. What would be the impact on gross margin of completely eliminating food waste valued at €1?
  4. Analyze the impact of a 15% reduction in ingredient costs on gross margin rate.
  5. Discuss possible strategies to improve the gross margin rate in light of the results obtained.

Proposed correction:

  1. Gross margin is determined by subtracting total direct costs from net sales.
    Gross margin = Net turnover – (Ingredient expenses + Other direct costs)
    Gross margin = €40 – (€000 + €18)
    Gross margin = €40 – €000 = €24
    Snack Santé achieves a gross margin of €16.

  2. The gross margin rate is the result of dividing the gross margin by the net turnover, multiplied by 100.
    Gross margin rate = (Gross margin ÷ Net sales) x 100
    Gross margin rate = (€16 ÷ €000) x 40 = 000%
    Gross margin represents 40% of turnover.

  3. Eliminating food waste saves €1 in costs.

New gross margin = €40 – (€000 – €24) = €000
This action would increase the gross margin by €1, reaching €000.

  1. A 15% reduction in ingredient costs reduces ingredient costs by €2 (700% of €15).
    New ingredient costs = €18 – €000 = €2
    New gross margin = €40 – (€000 + €15) = €300
    New gross margin rate = (€18 ÷ €700) x 40 = 000%
    The cost reduction increases the gross margin rate to 46,75%.

  2. To improve the gross margin rate, Snack Santé can explore the renegotiation of supplier contracts, the optimization of production processes to limit losses and the adjustment of sales prices according to costs and the market.

Formulas Used:

Title Formulas
Gross margin CA HT – (Expenses on ingredients + Other direct costs)
Gross margin rate (Gross margin ÷ HT turnover) x 100

Application: TechnoHorizon

States :

TechnoHorizon, an innovative company in the new technologies sector, wishes to evaluate its financial performance regarding the gross margin achieved. For the last financial year, it reports a turnover excluding tax of €60, production costs amounting to €000, and direct operating costs of €30.

Work to do :

  1. Determine TechnoHorizon's gross margin.
  2. Calculate the gross margin rate on turnover.
  3. Consider the effect of a 20% increase in revenue, with no increase in costs.
  4. What would be the effect on gross margin if operating expenses increased by 10%?
  5. Evaluate the need to optimize operational costs in light of financial results.

Proposed correction:

  1. Gross margin is calculated by subtracting total costs from net sales.
    Gross margin = Net turnover – (Production costs + Direct operating costs)
    Gross margin = €60 – (€000 + €30)
    Gross margin = €60 – €000 = €40
    TechnoHorizon has a gross margin of €20.

  2. The gross margin rate is obtained by dividing the gross margin by the net turnover, then multiplying by 100.
    Gross margin rate = (Gross margin ÷ Net sales) x 100
    Gross margin rate = (€20 ÷ €000) x 60 = 000%
    The gross margin rate is 33,33%.

  3. If the turnover increases by 20%, the new turnover excluding tax would be €72 (€000 + €60).

New gross margin = €72 – €000 = €40
With this increase, the gross margin would increase to €32, an increase of €000.

  1. A 10% increase in operating costs would lead to an increase of €1 (000% of €10).
    New costs = €10 + €000 = €1
    New gross margin = €60 – (€000 + €30) = €000
    This variation would reduce the gross margin to €19, indicating a decrease of €000.

  2. Optimizing operational costs is essential to maximizing TechnoHorizon's profitability. Results show that better cost management increases financial stability and competitiveness.

Formulas Used:

Title Formulas
Gross margin CA excluding VAT – (Production costs + Direct operating costs)
Gross margin rate (Gross margin ÷ HT turnover) x 100

Application: Artisan Perfumer

States :

Artisan Parfumeur, a creator of high-end fragrances, analyzes its performance to improve its gross margin. During the last half-year, it achieved a turnover excluding tax of €50, spent €000 on raw materials, and €20 on additional direct costs.

Work to do :

  1. Calculate the gross margin of Artisan Parfumeur.
  2. Evaluate the gross margin rate on turnover.
  3. Analyze the effects of a 5% reduction in raw material costs on gross margin.
  4. What would be the result if revenue increased by €4 through a new marketing campaign while maintaining current costs?
  5. Interpret the strategic role of reducing production costs for the Artisan Perfumer.

Proposed correction:

  1. The gross margin is obtained by subtracting direct costs from net turnover.
    Gross margin = Net turnover – (Raw material costs + Additional direct costs)
    Gross margin = €50 – (€000 + €20)
    Gross margin = €50 – €000 = €25
    Artisan Parfumeur achieves a gross margin of €25.

  2. The gross margin rate is calculated using the ratio of gross margin to net turnover, multiplied by 100.
    Gross margin rate = (Gross margin ÷ Net sales) x 100
    Gross margin rate = (€25 ÷ €000) x 50 = 000%
    Gross margin is equal to 50% of turnover.

  3. A 5% reduction in raw material costs reduces raw material costs by €1 (000% of €5).

New costs = €20 – €000 = €1
New gross margin = €50 – (€000 + €19) = €000
The cost reduction increases the gross margin by €1 to €000.

  1. By increasing the turnover by €4, the new turnover would be €000.
    New gross margin = €54 – €000 = €25
    This marketing initiative increases the gross margin to €29, an increase of €000.

  2. Strategically reducing production costs remains crucial for Artisan Parfumeur, enabling it to increase competitiveness without compromising quality, thereby improving long-term profits.

Formulas Used:

Title Formulas
Gross margin CA HT – (Expenditure on raw materials + Additional direct costs)
Gross margin rate (Gross margin ÷ HT turnover) x 100

Application: Educational Library

States :

Librairie Pédagogique wants to increase its profitability by effectively managing its margins. In the last financial year, it recorded a turnover excluding tax of €35, with book purchasing costs of €000, and direct expenses of €15.

Work to do :

  1. Calculate the gross margin of the Educational Bookstore.
  2. Determine the gross margin rate on sales.
  3. Consider the impact of a 10% increase in direct expenses on gross margin.
  4. What would the gross margin rate be if revenue increased by 5% with no increase in costs?
  5. Discuss the implications of reducing book inventory on the overall profitability of the bookstore.

Proposed correction:

  1. Gross margin is determined by removing purchasing costs and direct expenses from net sales.
    Gross margin = Net turnover – (Purchase costs + Direct charges)
    Gross margin = €35 – (€000 + €15)
    Gross margin = €35 – €000 = €19
    The gross margin of the Educational Bookstore amounts to €16.

  2. The gross margin rate is calculated by dividing the gross margin by the turnover, multiplying the result by 100.
    Gross margin rate = (Gross margin ÷ Net sales) x 100
    Gross margin rate = (€16 ÷ €000) x 35 = 000%
    The bookstore's gross margin rate is 45,71%.

  3. By increasing direct costs by 10%, costs increase by €400 (10% of €4).

New charges = €4 + €000 = €400
New gross margin = €35 – (€000 + €15) = €000
This increase reduces the gross margin to €15, a decrease of €600.

  1. If the turnover increases by 5%, the net turnover becomes €36.
    New gross margin = €36 – €750 = €19
    New gross margin rate = (€17 ÷ €750) x 36 = 750%
    Without additional costs, an increase in turnover brings the gross margin rate to 48,3%.

  2. Reducing inventory can optimize space and costs, however, reducing inventory too much could result in stockouts that impact sales and degrade customer service, compromising long-term profitability.

Formulas Used:

Title Formulas
Gross margin CA HT – (Purchase costs + Direct charges)
Gross margin rate (Gross margin ÷ HT turnover) x 100

Application: Green Maintenance

States :

Entretien Vert, an eco-friendly gardening service company, is considering reviewing its financial plans to improve its gross margin. For the previous quarter, it generated net sales of €45, with wage costs of €000, and other direct costs of €20.

Work to do :

  1. Determine the gross margin of Green Maintenance.
  2. Calculate the gross margin rate on turnover.
  3. Estimate the effect of a 15% reduction in labor costs on gross margin.
  4. If revenue increases by 10%, how would that impact gross margin, maintaining current costs?
  5. Propose a strategy to optimize turnover by streamlining operational costs.

Proposed correction:

  1. Gross margin is calculated by subtracting salary costs and other direct costs from net sales.
    Gross margin = Net turnover – (Salary costs + Other direct costs)
    Gross margin = €45 – (€000 + €20)
    Gross margin = €45 – €000 = €26
    Entretien Vert has a gross margin of €19.

  2. The gross margin rate is obtained by calculating the ratio of gross margin to net turnover, multiplied by 100.
    Gross margin rate = (Gross margin ÷ Net sales) x 100
    Gross margin rate = (€19 ÷ €000) x 45 = 000%
    The gross margin rate is 42,22%.

  3. By reducing wage costs by 15%, they decrease by €3 (000% of €15).

New salary costs = €20 – €000 = €3
New gross margin = €45 – (€000 + €17) = €000
This action would bring the gross margin to €22, an increase of €000.

  1. With a 10% increase in turnover, the net turnover becomes €49.
    New gross margin = €49 – €500 = €26
    This increase in turnover would raise the gross margin to €23, a gain of €500.

  2. To optimize revenue, it is advisable to evaluate initiatives such as diversification of services, improvement of performance through new technologies and proactive management of resources to maintain optimal operational costs.

Formulas Used:

Title Formulas
Gross margin CA excluding tax – (Salary costs + Other direct costs)
Gross margin rate (Gross margin ÷ HT turnover) x 100

Application: Music Harmony

States :

Musique Harmonie, an independent boutique selling classical instruments, seeks to maximize its gross margin with the following quarterly data presented: net sales of €70, cost of goods of €000, and other direct expenses of €30.

Work to do :

  1. Calculate the gross margin of Musique Harmonie.
  2. Determine the gross margin rate on sales.
  3. Analyze the impact of a 5% saving in product costs on gross margin.
  4. What would be the effect of increasing turnover by 15% while maintaining costs?
  5. Assess the importance for Musique Harmonie of stabilizing costs to achieve an optimal gross margin.

Proposed correction:

  1. Gross margin is calculated by subtracting the cost of products and other expenses from net sales.
    Gross margin = Net turnover – (Cost of products + Other direct expenses)
    Gross margin = €70 – (€000 + €30)
    Gross margin = €70 – €000 = €40
    Musique Harmonie's gross margin is €30.

  2. The gross margin rate is obtained by dividing the gross margin by the net turnover, multiplied by 100.
    Gross margin rate = (Gross margin ÷ Net sales) x 100
    Gross margin rate = (€30 ÷ €000) x 70 = 000%
    The gross margin rate is 42,86%.

  3. A 5% reduction in product cost reduces product cost by €1 (500% of €5).

New cost of products = €30 – €000 = €1
New gross margin = €70 – (€000 + €28) = €500
Thus, the savings made would increase the gross margin by €1.

  1. If the turnover increases by 15%, the net turnover increases to €80.
    New gross margin = €80 – €500 = €40
    This increase in turnover would increase the gross margin by €10.

  2. Controlling costs, while optimizing sales, remains crucial for Musique Harmonie, thus allowing it to generate substantial margins necessary for future growth and innovation.

Formulas Used:

Title Formulas
Gross margin CA HT – (Cost of products + Other direct expenses)
Gross margin rate (Gross margin ÷ HT turnover) x 100

Application: Wellness Retreat

States :

Wellness Retreat, a wellness and relaxation center, wants to evaluate its current profitability with an optimized gross margin. Currently, the center records a turnover excluding tax of €100, with costs related to therapists of €000, and other direct expenses of €40.

Work to do :

  1. Calculate the gross margin of Wellness Retreat.
  2. What is the gross margin rate on turnover?
  3. Estimate the impact of a 10% decrease in therapist costs on gross margin.
  4. Discuss the implications of an increase in turnover of €8, with an equivalent increase in other direct expenses.
  5. Analyze the impact of a strategy to increase the quality of services to improve the gross margin.

Proposed correction:

  1. Gross margin is determined by subtracting costs and other expenses from net sales.
    Gross margin = Net turnover – (Costs related to therapists + Other direct expenses)
    Gross margin = €100 – (€000 + €40)
    Gross margin = €100 – €000 = €60
    The gross margin of Bien-Être Retreat is therefore €40.

  2. The gross margin rate is obtained by dividing the gross margin by the net turnover, multiplying the result by 100.
    Gross margin rate = (Gross margin ÷ Net sales) x 100
    Gross margin rate = (€40 ÷ €000) x 100 = 000%
    The gross margin corresponds to 40% of turnover.

  3. A 10% reduction in therapist costs corresponds to a reduction of €4 (000% of €10).

New costs = €40 – €000 = €4
New gross margin = €100 – (€000 + €36) = €000
The cost reduction increases the gross margin by €4, reaching €000.

  1. An increase in turnover of €8 with an equivalent increase in other direct expenses would not affect the gross margin.
    New gross margin = (€100 + €000) – (€8 + €000) = €40
    The gross margin remains unchanged at €40.

  2. Improving the quality of services helps build customer loyalty, justify higher prices and optimize gross margin. This leads not only to immediate margin increases, but also to the longevity of the business.

Formulas Used:

Title Formulas
Gross margin CA HT – (Costs related to therapists + Other direct expenses)
Gross margin rate (Gross margin ÷ HT turnover) x 100

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