Gross margin is the difference between the revenue from the sale of goods and variable costs. Sometimes the definition of "marginal income" is used. This calculated indicator does not allow to characterize the financial condition of the company, however, it is necessary when calculating many indicators.
Thus, the ratio of marginal income to the amount of revenue received from the sale of goods determines the coefficient of gross margin. The variable costs include the costs of materials and raw materials for the main production, marketing costs, wages of the main production workers, etc.
Costs (variables) are directly proportional to the volume of production. The company is interested in lower costs per unit of output, as this allows for more profit. With a change in the volume of output of goods, costs increase (decrease), but per unit of output they have a constant constant value.
Sales revenue is calculated from all revenues that are associated with settlements, expressed in kind or in cash, for goods, services, work or property rights.
Gross margin shows how much the company has made to profit and cover fixed costs. The gross margin is determined in two ways.
In the first case, any direct expenses or variable costs, as well as a part of the overhead (general production) costs, which relate to the variables and depend on the volume of production, are deducted from the company's revenue received for the goods sold. In the second way, gross margin is calculated by adding up the company's profit and fixed costs.
There is also such a thing as average gross margin. In this case, the difference between the price and the average cost (variables) is taken. This category shows how a unit contributes to profitability and how it covers fixed costs.
Under the gross margin norm we understand the share of the marginal income in revenue, or for an individual product, the share of income in the price of the product. These indicators allow us to solve various production problems. For example, using the described coefficients, you can determine the profit for different volumes of production. To better understand the economic meaning of the gross margin indicator, we can consider the following problem.
Suppose a manufacturing company produces and sells goods for the production and sale of which has average variable costs of 100 rubles per unit. The product itself is sold at a price of 150 rubles per unit. Fixed costs of the company amount to 150 thousand rubles per month. It is necessary to calculate how much profit the company will have per month if sales are 4,000 units, 5,000 units, 6,000 units.
At the first stage of the decision, it is necessary to determine what value the gross margin and profit will take for each option, since fixed costs do not depend on the volume of production. The profit of the enterprise can be determined for any volume of production. To do this, you need to multiply the average gross margin by the volume of production, as a result, the total value of the marginal income will be obtained.
Further, fixed costs should be subtracted from the total value. As a result, it turns out that the profit of the enterprise will be 50, 100 and 150 thousand, respectively, for each case.
From the example shown, you can see that increasing profits can be achieved by increasing gross margin. To do this, reduce the selling price and increase sales, or reduce fixed costs and increase sales, or proportionally change costs (fixed and variable) and output.