GROSS PROFIT MARGIN ON SALES Definition

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GROSS PROFIT MARGIN ON SALES (GPM) is one of the key performance indicators. The gross profit margin gives an indication on whether the average markup on goods and services is sufficient to cover expenses and make a profit. GPM shows the relationship between sales and the direct cost of products/services sold. It measures the ability of both to control costs and to pass along price increases through sales to customers. The gross profit margin should be stable over time. A persistent gradual decrease is likely to indicate that productivity needs to be increased to return profitability back to previous levels. Generally:

>40% = Indicates a sustainable competitive advantage

< 40% = Indicates competition may be eroding margins

< 20% = There is likely no sustainable competitive advantage

Formula: Gross Profit / Net Revenue

Learn new Accounting Terms

REASONABLE ASSURANCE, in internal control, is the fact that internal controls, no matter how well designed and operated, cannot guarantee that an entity’s objectives will be met because of inherent limitations in all internal control systems.

SEPARABLE COSTS are all costs (manufacturing, marketing, distribution, etc.) incurred beyond the split-off point that are assignable to one or more individual products.

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