Gross margin is the amount of money a company has left after subtracting all direct costs of producing or purchasing the goods or services it sells. The higher the gross margin, the more money the company is able to contribute to its indirect costs and other expenses like interest. This is why gross margin is also often referred to as contribution margin, a term that is used interchangeably.
Gross margin can be expressed in dollars or as a percentage of revenue. Business owners and finance professionals use it as a measure of a company’s operational performance over time and to compare and rank groups of companies based on their performance.
More about gross margin
The income statement below shows a manufacturing company with a gross margin of $65,000 on revenues of $100,000. This means every $1 of sales contributes 65 cents to the payment of the company’s indirect costs, interest and other expenses.