COGSīoth operating expenses and COGS are expenditures to run a business, but they are listed separately on the income statement. The business expenses incurred to run these kinds of businesses are known as the cost of services and are not listed as COGS. These may include professional singers, accountants, law firms, and Realtors. Service companies, in general, do not have any cost of goods sold, nor do they have any inventories. It is quite clear that Company A is more profitable than company B. Let us consider two rival companies manufacturing similar items that sell for the same price but have different COGS. This chart illustrates the principle of gross margin. Gross Profit Margin = (Revenue – COGS) / Revenue So we can calculate the gross profit margin using the following equation:
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