Gross Margin Calculator

Formula and inputs

Gross profit is revenue minus cost of goods sold. Gross margin is gross profit divided by revenue, times 100. COGS holds costs that scale directly with making or acquiring what you sell: materials, production labor, inbound freight, and often payment processing; rent, marketing, and salaries that exist regardless of volume stay below the line in operating expenses.

Example scenario

Candle maker margin check

A candle business sold $18,000 last month. Direct costs were $7,600: wax, wicks, jars, and packaging at $5,900, inbound shipping at $700, and payment processing at $1,000. The maker wants the margin before a planned price increase.

• -Revenue: $18,000
• -Cost of goods sold: $7,600
• -Operating expenses: kept separate for net view
• -Industry: ecommerce benchmarks

Gross profit is $10,400, a 57.8 percent gross margin. Whether that is healthy depends on what operating expenses still need covering; a 58 percent gross margin funding heavy ad spend can produce a thinner bottom line than a 45 percent margin business with no marketing costs.

Common mistakes

• -Moving costs in and out of COGS month to month, making margin trends meaningless.
• -Leaving inbound freight and payment fees out of direct costs, flattering the margin.
• -Comparing your gross margin against other industries where cost structures differ completely.

How to interpret the output

• -A falling gross margin with stable pricing means input costs are creeping; check supplier pricing and shipping before blaming sales mix.
• -Compare margin by product, not just in total; averages hide the products quietly subsidizing the rest.
• -Gross margin sets the ceiling for everything below it: no operating discipline can rescue a structurally thin gross margin.

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