# What is Sales Margin Calculation?

## Sales Margin Calculation

Sales margin, often referred to as profit margin or gross margin, is a measure of profitability. It represents the percentage of total sales revenue that a company retains after incurring the direct costs associated with producing the goods or services sold. The sales margin gives an idea of the company’s profitability at a raw, operational level.

The formula to calculate the sales margin (or gross margin) is:

Sales Margin (Gross Margin) = (Sales Revenue − Cost of Goods Sold (COGS) / Sales Revenue) × 100

Where:

• Sales Revenue is the total revenue from goods sold or services provided.
• Cost of Goods Sold (COGS) represents the direct costs associated with the production of the goods sold by a company. This includes raw materials, labor costs directly associated with the production, and factory overheads.

The result is expressed as a percentage, and the higher the percentage, the more the company retains on each dollar of sales, which can contribute to its other expenses and potential profits.

## Example of Sales Margin Calculation

Let’s dive into a detailed fictional example to understand the sales margin calculation.

Scenario: “BlueSky Tech Store” sells electronic gadgets. In March 2023, they had the following figures:

• Total Sales Revenue: \$500,000 (This includes sales from laptops, smartphones, headphones, and other electronic gadgets.)
• Cost of Goods Sold (COGS):
• Purchase of laptops: \$200,000
• Purchase of smartphones: \$150,000
• Other electronic gadget purchases: \$75,000
• Total COGS = \$200,000 + \$150,000 + \$25,000 + \$75,000 = \$450,000

Now, using the sales margin formula:

Sales Margin = (Sales Revenue − COGS / Sales Revenue) × 100

Plug in the values:

Sales Margin = (500,000 − 450,000 / 500,000) × 100

Sales Margin = (50,000 / 500,000) ×100

Sales Margin = 0.10 × 100 = 10%

So, “BlueSky Tech Store” has a sales margin of 10% for the month of March 2023. This means that for every dollar the store made in sales, they retained \$0.10 as gross profit after accounting for the direct costs of the products. The remaining \$0.90 out of every dollar was spent on acquiring the products they sold.

This 10% margin is before considering other expenses like rent, salaries, utilities, and marketing. Such expenses would be subtracted later when calculating net profit margins.