How gross margin is calculated
Gross profit is selling price minus the direct unit cost. Gross margin divides that profit by price. Quantity scales the same unit result into revenue and total gross profit.
Unit profit = price − unit cost
Gross margin = unit profit ÷ price × 100%
Revenue = price × quantity
Total gross profit = unit profit × quantity
Gross margin = unit profit ÷ price × 100%
Revenue = price × quantity
Total gross profit = unit profit × quantity
Example
A $50 item that costs $30 has $20 of unit profit and a 40% gross margin. One hundred units produce $5,000 of revenue and $2,000 of gross profit before overhead.
Gross margin is not net profit
Rent, salaries, ads, payment fees, returns, depreciation, interest, and tax are not subtracted. Markup uses cost as the denominator and is a different percentage from margin.