Page 141 - BA2 Integrated Workbook - Student 2017
P. 141
Performance measurement
Gross margin
Gross margin % = –––––––––––––––––
Sales revenue
This measure helps to highlight the relationship between sales revenues and
production/purchasing costs.
A high gross profit margin is desirable. It indicates that either sales prices/volumes
are high or that production costs are being kept well under control.
As it is a % measure, it can be used to compare the performance of different areas of
the business or different products.
Division 1 Division 2
1,800 1,700
Gross margin % = ––––––––––– = 36% ––––––––––– = 57%
5,000 3,000
2.4 Net (operating) margin and net (operating) margin %
Net (operating) margin = gross margin – overheads
Net margin is also known as operating margin. It is also called earnings before
interest and tax in the financial statements. This is a useful measure which shows
how much profit the company has generated in the period. It shows if the sales
revenue is enough to cover the direct cost of the item sold and all expenses.
Division 1 Division 2
$000 $000
Sales revenue 5,000 3,000
Variable production costs 2,500 800
Fixed production costs 700 500
Variable non-production costs 200 150
Fixed non-production costs 800 400
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Net (operating) margin 800 1,150
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