Gross margin calculator

Gross profit of $200,000 on $500,000 of sales is a 40 percent margin. The same profit measured against the $300,000 of cost is a markup of about 66.7 percent. Both describe the same transaction and they are not interchangeable.

Margin divides by sales; markup divides by cost. Pricing conversations use markup, financial statements use margin, and quoting one as the other is the single most expensive arithmetic confusion in small business pricing.

Direct costs only: materials, the labour that made the thing, freight in. Rent, salaries for people who did not make the product, marketing and administration are operating expenses and sit below the gross profit line.

Moving a cost across that line changes the margin without changing the business, which is why comparisons between companies need the same definition on both sides. The operating margin calculator measures the next line down, after those operating costs.

The second example, $250,000 of sales and $150,000 of cost, produces $100,000 of gross profit and the same 40 percent margin. Half the size, identical economics, and the percentage says so immediately while the amounts do not.

That is what makes margin the first ratio anyone looks at. It survives comparison across periods and across companies of different sizes, which raw profit never does.

One period of sales against the direct cost of those sales. It sets the ceiling on every profit measure below it, because operating costs, interest and tax all come out of what gross margin leaves. Gross margin against net margin traces the distance between the two, and variable costs covers what usually sits in COGS. This is educational material, not financial advice.