# Gross margin: definition and calculation

gross margin - the difference obtained between the proceeds from the sale of goods and variable costs.Sometimes using the definition of "profit margin".This Estimate does not allow to characterize the financial condition of the company, but it is necessary in the calculation of many indicators.

Thus, the ratio of marginal income to the amount of proceeds received from the sale of goods, determine the ratio of gross margin.For variable costs include the costs of materials and raw materials for primary production, distribution costs, wages of production workers, etc.

costs (variable) are directly proportional to the volume of production.The company is interested that the costs per unit of output were lower, as this allows you to get more profit.If you change the volume of the release of goods, respectively, increase (decrease) the costs, but per unit of output they have a permanent unchanging value.

Proceeds from sales is calculated by taking into account all revenues that are associated with the calculations, expressed in kind or cash for goods, services, works or property rights.

Gross margin shows what contribution the company has made for profit and fixed costs.The value of gross margin is determined in two ways.

In the first case of revenue received for goods sold is subtracted any direct costs or variable costs as well as overheads (general production) costs that are variable and depend on the production volume.The second way gross margin is calculated by adding the profits and fixed costs of the company.

There is also such a thing as an average gross margin.In this case we take the difference between price and average cost (variable).This category shows what contribution the product unit in a profit, and it covers fixed costs.

Under the standard gross margin to understand the value of a share in the revenue income margin, or a single product - the share of income in the product price.These figures allow us to solve various production problems.For example, using the described factors can determine the profits at different production volumes.To better understand the economic meaning of the indicator "gross margin", you might consider the following problem.

For example, a manufacturing company produces and sells products, the production and marketing which has an average variable costs in the amount of \$ 100 per unit.The very same product is sold at a price of 150 rubles per unit.Fixed costs of up to 150 thousand. Rubles per month.It is necessary to calculate how much profit will be firm in the month if the sale will amount to 4,000 units, 5,000 units. 6,000 units.

In the first stage of the solution you need to determine what value will gross margin and profit for each option, as the fixed costs are not depending on the volume of production.The company's profit can be determined at any volume production.To do this, multiply the average of the gross margin in the output, the result will be the total value of marginal income.Next

of the total fixed costs must be deducted.The result is that the company's profit will be 50, 100 and 150 thousand. Respectively for each case.

From the example shown we can see that to increase profits can be increased gross margin.To do this, reduce the sales price and sales volume increase or reduce fixed costs and increase sales, or in proportion to the change costs (fixed and variable) and output.