How to Calculate Gross Margin on Sales | 9 Exercises

Application: Golden Delights Pastry

States :

The bakery Les Délices Dorés is expanding and wants to analyze its profitability. It sold 500 cakes at a price of €15 excluding tax each. The unit cost price of the cakes is €9 excluding tax. The company wants to determine the gross margin on sales and evaluate different strategies to improve it.

Work to do :

1. Calculate the unit margin made on each cake sold.
2. What is the total gross margin on sales made by Les Délices Dorés?
3. If the bakery increases the selling price by €2, what would be the new amount of the unit margin?
4. What would be the percentage increase in total gross margin if the selling price is increased by €2 while maintaining the same level of sales?
5. Discuss the strategic implications of this price increase for customer retention and competitiveness.

Proposed correction:

1. To calculate the unit margin, we use the formula:
   Unit margin = PV excluding tax – PA excluding tax
   Unit margin = €15 – €9 = €6
   The unit margin on each cake is €6.

2. To determine the total gross margin, we use the formula:
   Total gross margin = Unit margin x Quantity sold
   Total gross margin = €6 x 500 = €3
   The total gross margin amount is €3.

3. If the sale price increases by €2:

New PV excluding tax = €15 + €2 = €17
New unit margin = €17 – €9 = €8
The unit margin would then be €8.

4. To assess the increase in total gross margin:
   New total gross margin = €8 x 500 = €4
   Increase = €4 – €000 = €3
   Percentage increase = (€1 ÷ €000) x 3 = 000%
   The total gross margin would increase by 33,33%.

5. If the selling price is increased, it can improve the gross margin, but it is essential to consider the consequences for customers. A price increase could alienate some customers if they do not see added value. The bakery must therefore ensure that the increase is justified by quality or other competitive factors to maintain customer loyalty and anchor its position in the market.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Total gross margin	Unit margin x Quantity sold
Margin increase percentage	(Increase ÷ Initial Margin) x 100

Application: TechStore

States :

TechStore, a store specializing in electronic gadgets, sells 300 tablets each month at a price of €250 excluding VAT. The purchase price excluding VAT of the tablets is €180. The company is working to improve its profitability and wants to evaluate its current gross margin to decide whether it is necessary to adjust its prices or sales volumes.

Work to do :

1. Calculate the unit margin for each tablet.
2. Determine the amount of total gross margin on monthly sales.
3. If TechStore offers a 5% discount on the sale price, what will the new unit margin be?
4. What would be the total impact of this discount on monthly gross margin if sales increase by 20% due to the discount?
5. Consider the strategic pros and cons of offering such a discount in the short and long term.

Proposed correction:

1. The unit margin is calculated as follows:
   Unit margin = PV excluding tax – PA excluding tax
   Unit margin = €250 – €180 = €70
   The unit margin is €70 per tablet.

2. For the total monthly gross margin:
   Total gross margin = Unit margin x Quantity sold
   Total gross margin = €70 x 300 = €21
   The total gross margin amount is €21.

3. With a 5% discount on the sale price:

Discount = 5% of €250 = €12,50
New PV excluding VAT = €250 – €12,50 = €237,50
New unit margin = €237,50 – €180 = €57,50
The new unit margin would be €57,50.

4. If sales increase by 20% due to the discount:
   New quantity sold = 300 x (1 + 20%) = 360
   New total gross margin = €57,50 x 360 = €20
   The total impact is a decrease in gross margin compared to the initial figure, going from €21 to €000, a decrease of €20.

5. Offering a discount may attract more customers in the short term and boost sales. However, in the long term, it can erode the perception of quality and reduce profit margin, especially if sales do not increase enough to offset the reduction in unit margin. It is crucial for TechStore to assess this balance to maintain its profitability and competitive position.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Total gross margin	Unit margin x Quantity sold
Discount on sale price	Discount in % x PV excluding VAT
New total gross margin	New Unit Margin x New Quantity Sold

Application: Le Gourmet Savoureux Restaurant

States :

The restaurant Le Gourmet Savoureux offers a special menu that includes a main course billed at €30 excluding VAT. The cost of ingredients for each dish is €12 excluding VAT. Despite the influx of customers, the restaurant is concerned about its profitability and wants to analyze its gross margin on these dishes to determine its financial performance.

Work to do :

1. Calculate the unit margin for each dish in the special menu.
2. If the restaurant sells 600 dishes per month, what is the total monthly gross margin?
3. If the cost of ingredients increases by 10%, what would be the new impact on the unit margin?
4. What would be the effect on total gross margin if the restaurant decided to increase the price of the main course by 20% to offset the increased costs?
5. Analyze the strategic implications of the price increase for the restaurant, in terms of customer perception and sales volume.

Proposed correction:

1. The unit margin is determined by the following formula:
   Unit margin = PV excluding tax – PA excluding tax
   Unit margin = €30 – €12 = €18
   Each dish generates a unit margin of €18.

2. To obtain the total monthly gross margin, let's calculate:
   Total gross margin = Unit margin x Quantity sold
   Total gross margin = €18 x 600 = €10
   The monthly gross margin amounts to €10.

3. With a 10% increase in ingredient costs:

New PA HT = €12 x (1 + 10%) = €13,20
New unit margin = €30 – €13,20 = €16,80
The unit margin falls to €16,80.

4. In the event of a 20% price increase:
   New PV excluding tax = €30 x (1 + 20%) = €36
   New unit margin = €36 – €13,20 = €22,80
   New total gross margin = €22,80 x 600 = €13
   The price increase would result in an increase in the total gross margin to €13, an increase of €680 compared to the initial scenario.

5. Raising prices can be a double-edged sword. It can increase revenue, but it can also hurt customers’ perceptions of value for money, which can reduce sales volume. The Tasty Gourmet must skillfully adjust price while improving or maintaining perceived quality to avoid a drop in traffic.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Total gross margin	Unit margin x Quantity sold
New costs after increase	PA HT x (1 + Increase rate in %)
New margin after increase	New PV HT – New PA HT
New total gross margin	New unit margin x Quantity sold

Application: Unlimited Events Agency

States :

The agency Événements Illimités regularly organizes business conferences charging €2 excluding VAT per event. The organization costs €000 excluding VAT per conference. The agency wants to monitor its financial performance by calculating the gross margin on its events.

Work to do :

1. What is the unit margin on each event organized by the agency?
2. If the agency organizes 15 conferences per quarter, what is the total quarterly gross margin?
3. Suppose the organization costs increase by €150, how would this affect the unit margin?
4. What strategy could the agency consider to maintain or even improve the gross margin without increasing the selling price?
5. Assess the potential impact of these strategies on the agency's attractiveness to its clients.

Proposed correction:

1. The unit margin is determined as follows:
   Unit margin = PV excluding tax – PA excluding tax
   Unit margin = €2 – €000 = €1
   The unit margin per event is €800.

2. To calculate quarterly gross margin:
   Total Gross Margin = Unit Margin x Quantity of Events
   Total gross margin = €800 x 15 = €12
   The quarterly gross margin is €12.

3. If the costs increase by €150:

New PA HT = €1 + €200 = €150
New unit margin = €2 – €000 = €1
The new unit margin would be €650.

4. To maintain or improve gross margin, the agency could seek to optimize organizational costs, perhaps by negotiating better rates with suppliers or improving operational efficiency. Another possibility: adding value-added services to enrich the offerings without touching the base price.

5. Cost optimization strategies can strengthen the agency's competitiveness without impacting the customer price. By adding value, the agency can retain its customers and even attract new ones, capitalizing on innovation in its services while controlling its margins.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Total gross margin	Unit Margin x Quantity of Events
New margin after cost increase	PV HT – (PA HT + Increase in costs)

Application: Knowledge and Understanding Library

States :

The bookstore Savoir et Connaissance sells a textbook for €45 excluding VAT. The purchase cost of the textbook is €32 excluding VAT. Management wants to examine the profitability of this product and assess the impact of potential supplier cost reductions on its gross margin.

Work to do :

1. Calculate the unit margin for each textbook.
2. If 200 textbooks are sold each month, what is the monthly gross margin?
3. By negotiating, the bookstore gets a 10% discount on the purchase cost. What is the new impact on the unit margin?
4. Assuming monthly sales volume is maintained, how much is the total gross margin increased as a result of this reduction?
5. Discuss the strategic implications of such cost reductions on supplier relationships and pricing strategy.

Proposed correction:

1. To calibrate the unit margin:
   Unit margin = PV excluding tax – PA excluding tax
   Unit margin = €45 – €32 = €13
   The unit margin is €13.

2. Calculate the monthly gross margin for 200 manuals:
   Total gross margin = Unit margin x Quantity sold
   Total gross margin = €13 x 200 = €2
   The monthly gross margin amounts to €2.

3. With a 10% discount on the purchase cost:

Discount = 10% of €32 = €3,20
New PA HT = €32 – €3,20 = €28,80
New unit margin = €45 – €28,80 = €16,20
The unit margin increases to €16,20.

4. Total gross margin after cost reduction:
   New total gross margin = €16,20 x 200 = €3
   The total gross margin increase is therefore €3 – €240 = €2.

5. Achieving cost reduction can improve profitability while keeping the price competitive. However, the bookstore must maintain good relationships with suppliers, and avoid cutting costs too much at the risk of compromising quality. Such a strategic approach allows the gains to be invested in customer loyalty or improving the product offering.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Total gross margin	Unit margin x Quantity sold
New margin after cost reduction	PV HT – (PA HT – Reduction received)

Application: InnovAuto Company

States :

InnovAuto, a specialist in car accessories, sells audio systems at a price of €320 excluding VAT. The supply cost per unit is €210 excluding VAT. The company is considering rethinking its commercial and financial strategies to better understand its performance in terms of gross margin.

Work to do :

1. Determine the unit margin on each audio system sold.
2. If you sell 100 systems per month, calculate the total monthly gross margin.
3. If the cost of supply decreases by 8%, what is the impact on the unit margin?
4. Ensuring continued sales, how much would the total gross margin be increased after this cost reduction?
5. Analyze the long-term effects of reducing supplier costs on InnovAuto's financial health and growth.

Proposed correction:

1. Calculation of unit margin:
   Unit margin = PV excluding tax – PA excluding tax
   Unit margin = €320 – €210 = €110
   The unit margin generated is €110 per unit.

2. To estimate the monthly gross margin:
   Total gross margin = Unit margin x Quantity sold
   Total gross margin = €110 x 100 = €11
   The monthly gross margin is €11.

3. With an 8% reduction in the cost of supply:

Decrease = 8% of €210 = €16,80
New PA HT = €210 – €16,80 = €193,20
New unit margin = €320 – €193,20 = €126,80
The unit margin increases to €126,80.

4. New total gross margin after reduction:
   New total gross margin = €126,80 x 100 = €12
   The increase in total gross margin is €12 – €680 = €11.

5. Lowering supplier costs can provide a better profit margin and strengthen InnovAuto’s competitiveness. But excessive discounts can affect quality and jeopardize supplier relationships. Balancing cost reduction with maintaining high standards is crucial to ensure sustainable growth.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Total gross margin	Unit margin x Quantity sold
New margin after cost reduction	PV HT – (PA HT – Cost reduction)

Application: Bakery Artisan Baker

States :

The bakery Artisan Boulanger offers special baguettes at a price of €2,50 excluding VAT each. The unit cost price is €1,00 excluding VAT. By examining its performance, the bakery wants to optimize its gross margin to improve its profitability.

Work to do :

1. Calculate the unit margin for each baguette.
2. If monthly production reaches 5 baguettes, what is the total gross margin?
3. If the cost price is reduced by 5%, what is the effect on the unit margin?
4. What is the total financial impact of this reduction on the monthly gross margin?
5. Assess the implications of cost reduction for the bakery's market positioning.

Proposed correction:

1. Unit margin calculated by:
   Unit margin = PV excluding tax – PA excluding tax
   Unit margin = €2,50 – €1,00 = €1,50
   Each baguette generates a margin of €1,50.

2. For the total gross margin with 5 baguettes sold:
   Total gross margin = Unit margin x Quantity produced
   Total gross margin = €1,50 x €5 = €000
   The total gross margin amounts to €7.

3. 5% reduction on unit cost:

Discount = 5% of €1,00 = €0,05
New PA HT = €1,00 – €0,05 = €0,95
New unit margin = €2,50 – €0,95 = €1,55
The unit margin increases to €1,55.

4. Gross margin after reduction:
   New total gross margin = €1,55 x €5 = €000
   The total gross margin increases by €7 – €750 = €7 for the month.

5. Reducing costs increases margins and can position the bakery favorably in a competitive market. However, it must ensure that quality remains unchanged to retain customers and maintain a good brand image.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Total gross margin	Unit margin x Quantity produced
New margin after cost reduction	PV HT – (PA HT – Reduction)

Application: HighTech Solutions Company

States :

HighTech Solutions develops and sells professional software at €1 excluding VAT each. The cost of development and distribution is €000 excluding VAT per software. In order to meet new market requirements, the company wants to analyze its margins to decide on possible price revisions.

Work to do :

1. What is the unit margin made on each software sold?
2. If 50 software are sold per month, calculate the monthly gross margin.
3. With a 10% cost increase decided by the technical department, what would be the new impact on the unit margin?
4. Considering an increase in costs, how could the company compensate for this loss without increasing the selling price?
5. Develop the strategic implications of these changes on the company's competitiveness.

Proposed correction:

1. For the unit margin:
   Unit margin = PV excluding tax – PA excluding tax
   Unit margin = €1 – €000 = €600
   Each software brings a margin of €400.

2. Monthly gross margin for 50 units sold:
   Total gross margin = Unit margin x Quantity sold
   Total gross margin = €400 x 50 = €20
   The monthly gross margin is €20.

3. With a 10% cost increase:

New PA HT = €600 x 1,1 = €660
New unit margin = €1 – €000 = €660
The unit margin decreases to €340.

4. To offset cost increases, the company can improve the efficiency of its operations, reduce unnecessary expenses, or attempt to sell more products through a discount strategy to increase volumes.

5. Cost increases put pressure on profit margins and may require internal adjustments to maintain competitiveness. HighTech Solutions must balance cost, quality and price to remain attractive in a constantly changing market.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Total gross margin	Unit margin x Quantity sold
New costs after increase	PA HT x (1 + Increase rate)

Application: BioGalore Farm

States :

BioGalore Farm produces organic fruit baskets that sell for €35 excluding VAT. The production cost per basket is €22 excluding VAT. Following a change in cultivation methods aimed at reducing costs without compromising quality, the farm wants to assess the effect on gross margin.

Work to do :

1. Calculate the unit margin per basket sold.
2. For a production of 300 baskets per month, what is the total gross margin?
3. If the new methods reduce the production cost by €4, what is the new impact on the unit margin?
4. How much does the total gross margin increase due to this cost reduction?
5. Provide an analysis of the potential positive and negative consequences of these new methods on the social and ecological responsibility of the company.

Proposed correction:

1. Unit margin:
   Unit margin = PV excluding tax – PA excluding tax
   Unit margin = €35 – €22 = €13
   Each basket generates a margin of €13.

2. Total margin for 300 baskets:
   Total gross margin = Unit margin x Quantity produced
   Total gross margin = €13 x 300 = €3
   The total gross margin is €3.

3. With a cost reduction of €4:

New PA HT = €22 – €4 = €18
New unit margin = €35 – €18 = €17
The unit margin increases to €17.

4. New total gross margin:
   New total gross margin = €17 x 300 = €5
   The increase in total gross margin is €5 – €100 = €3.

5. New methods can generate cost savings, increasing profit margins. However, it is crucial to evaluate them from a social and ecological perspective to ensure they do not compromise BioGalore’s commitment to sustainable and ethical agriculture.

Formulas Used:

Title	Formulas
Unit margin	PV HT – PA HT
Total gross margin	Unit margin x Quantity produced
New margin after cost reduction	PV HT – (PA HT – Cost reduction)