Business Building Blocks – Basic of Costing

​Following are the direct definition of following terms:

  1. Sales 
  2. Cost price
  3. Markup
  4. Gross Profit
  5. Gross Profit margin 
  6. Gross Contribution margin 

Below are simply the first definition from search. 

sale

seɪl/

noun

plural noun: sales

  1. 1.

    the exchange of a commodity for money; the action of selling something.

    “we withdrew it from sale”

    synonyms: selling, vending, disposal; 

cost price

noun

  1. the price at which goods are or have been bought by a merchant or retailer.

markup

ˈmɑːkʌp/

noun

  1. 1.

    the amount added to the cost price of goods to cover overheads and profit.

    “a mark-up of 50 per cent”


Gross profit is a company’s total revenue (equivalent to total sales) minus the cost of goods sold. Gross profit is the profit a company makes after deducting the costs associated with making and selling its products, or the costs associated with providing its services.


Gross profit margin is a financial metric used to assess a company’s financial health and business model by revealing the proportion of money left over from revenues after accounting for the cost of goods sold (COGS). Gross profit margin, also known as gross margin, is calculated by dividing gross profit by revenues.

Gross Contribution Margin is Net Sales minus the variable product costs and the variable period expenses. The Contribution Margin Ratio is the Contribution Margin as a percentage of Net Sales.


Let’s illustrate the difference between gross margin and contribution margin with the following information: company had Net Sales of $600,000 during the past year. Its inventory of goods was the same quantity at the beginning and at the end of year. Its Cost of Goods Sold consisted of $120,000 of variable costs and $200,000 of fixed costs. Its selling and administrative expenses were $40,000 of variable and $150,000 of fixed expenses.


The company’s Gross Margin is: Net Sales of $600,000 minus its Cost of Goods Sold of $320,000 ($120,000 + $200,000) for a Gross Profit of $280,000 ($600,000 – $320,000). The Gross Margin or Gross Profit Percentage is the Gross Profit of $280,000 divided by $600,000, or 46.7%.


The company’s Contribution Margin is: Net Sales of $600,000 minus the variable product costs of $120,000 and the variable expenses of $40,000 for a Contribution Margin of $440,000. The Contribution Margin Ratio is 73.3% ($440,000 divided by $600,000).

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