The importance of Gross margin

• Example 1: Sales price ok, sales volume ok compared to the size of the company:

Sales income 100 units x 60.000 6.000.000

- Variable expenses

100 units x 30.000 -3.000.000

Gross margin 3.000.000 50 %

- Fixed costs -2.000.000

Profit 1.000.000 17 %

The importance of Gross margin

• Example 2: Sales price too low, volume ok:

Sales income 100 units x 50.000 5.000.000

- Variable expenses

100 units x 30.000 -3.000.000

Gross margin 2.000.000 40 %

- Fixed costs -2.000.000

Profit 0 0 %

Low Gross margin indicates that the sales price is too low compared to the variable costs (raw materials, production costs,…)

The importance of Gross margin

• Example 3: Sales price ok, volume too low:

Sales income 70 units x 60.000 4.200.000

- Variable expenses

70 units x 30.000 -2.100.000

Gross margin 2.100.000 50 %

- Fixed costs -2.000.000

Profit 100.000 2,5 %Low profit-% indicates that the sales price is too low compared to the variable costs, or that the sales volume is too low compared to the fixed costs.