How is gross margin calculated?

Gross margin is calculated by subtracting the cost of goods sold (COGS) from total merchandise sales. This calculation shows how much money remains from sales after accounting for the costs directly associated with producing or purchasing the goods sold. The resulting figure is an important indicator of a company's financial health, as it reflects the efficiency of production and the pricing strategy in relation to the costs directly tied to goods sold.

This metric is used to assess how much profit is available to cover operating expenses, taxes, and other financial obligations, as well as to provide insights for making pricing and inventory management decisions. By focusing on the difference between total sales and the COGS, businesses can determine if they are generating sufficient revenue to sustain their operations and achieve profitability.