It is a ratio expressing relationship between gross profit earned to net sales. it is an useful indication of the profitability of business. For example, if net sales are $40,000, and gross profit is $1,00,000 then the gross profit ratio is 25%.
1,00,000 x 100
= --------------------
40,000
= 25%
This ratio is usually expressed as a percentage. A ratio of 25% shows that for a sale of every $100, a margin of $25 is avalable from which operating expenses of business are to be recovered. The ratio shows whether the mark-up obtained on cost of production is sufficient. there is no standard showing reasonableness of gross profit ratio. However, it must be enough to cover its operating expenses. In many industries, there are more or less recognised gross profit ratios nd business should strive to maintain this standard.
If this ratio is low, it indicates that the cost of sales is high or that the purchasing is inefficient. Alternatively, it may also mean that due to depression, the selling price is reduced but there may be no corresponding reduction in cost of sales. In such case, the management must invrstigate the causes and try to bring up this ratio.
= --------------------
40,000
= 25%
This ratio is usually expressed as a percentage. A ratio of 25% shows that for a sale of every $100, a margin of $25 is avalable from which operating expenses of business are to be recovered. The ratio shows whether the mark-up obtained on cost of production is sufficient. there is no standard showing reasonableness of gross profit ratio. However, it must be enough to cover its operating expenses. In many industries, there are more or less recognised gross profit ratios nd business should strive to maintain this standard.
If this ratio is low, it indicates that the cost of sales is high or that the purchasing is inefficient. Alternatively, it may also mean that due to depression, the selling price is reduced but there may be no corresponding reduction in cost of sales. In such case, the management must invrstigate the causes and try to bring up this ratio.
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