Using Table 1, calculate the gross profit margin.
Show all workings.
How to approach this question
1. First, you need to calculate the Gross Profit. The formula is: Gross Profit = Revenue - Cost of Goods Sold.
2. Find the values for Revenue and Cost of Goods Sold from Table 1.
3. Calculate the Gross Profit.
4. Next, use the Gross Profit to calculate the Gross Profit Margin. The formula is: Gross Profit Margin = (Gross Profit / Revenue) x 100.
5. Substitute your values into the formula and calculate the final percentage.
The Gross Profit Margin is a profitability ratio that shows the percentage of revenue that exceeds the cost of goods sold (COGS).
- **Step 1: Calculate Gross Profit.**
Gross Profit = Revenue - COGS
From the table, Revenue = £1,080,000 and COGS = £270,000.
Gross Profit = 1080 - 270 = 810 (£000).
- **Step 2: Calculate Gross Profit Margin.**
Gross Profit Margin = (Gross Profit / Revenue) × 100
Gross Profit Margin = (810 / 1080) × 100
Gross Profit Margin = 0.75 × 100 = 75%.
This means that for every £1 of revenue, the business makes 75p in gross profit.
Common mistakes
✗ Using Total Expenses instead of Cost of Goods Sold.
✗ Calculating Net Profit Margin instead of Gross Profit Margin.
✗ Forgetting to multiply by 100 to get a percentage.
Expert