Calculating Gross Margin 



]ean Bernard Gagne 



Essentially, before figuring gross margin, you need to 

 calculate two categories of cost: direct (variable) 

 and indirect (fixed). 



Direct costs are those which are directly related to 

 the product: raw materials, freight charges, delivery to 

 the customer. The word "variable" is generally used to 

 identify these costs. Indirect costs are all the other ex- 

 penses of the business and are known as "fixed" costs. 



Let's say a garden center sells the following — trees, 

 shrubs and perennials, annuals and bulk goods, and 

 gardening supplies. Let's refer to the table below to 

 analyze a year's sales. 



The percentage represents the difference between 

 purchase price and sales price. Markup is percentage 

 over the cost. Thus, this garden center has a gross mar- 

 gin of $67,000, with which to pay general expenses (in- 

 cluding wages) or "fixed" costs — which leaves an accept- 

 able net profit. 



Should this garden center stop selling flowers be- 

 cause it doesn't pay enough? Suppose it did this. If 



there were no flowers for sale, some customers will 

 stop coming. The $8000 margin would disappear, along 

 with the $2,500 used for maintenance. An employee 

 would be cut, a valuable person in the busy season... 

 The alternative would be to increase the margins by 

 $10,5000 on the remaining sales of $128,000, thus in- 

 creasing the percentage of the 2.0% markup to 2.2%. 



If a garden center adds a new line — let's say turf — 

 with a potential sales volume of $10,000, without other 

 direct costs and with a margin of 25%, that margin be- 

 comes net profit. 



Thus, we can see that a garden center can increase 

 its offerings as long as the gross margin is positive Re- 

 moving a product line because it doesn't bring in 

 enough is a mistake: no matter how small its profit, 

 each line offered adds to the overall enterprise. 



IVl. Gagne is owner and operator of ]ardins \ean Bernard Cagne, 

 995, Route 141, Magog, Quebec J IX 3W2. His telephone and 

 fax are 819-843-5071. 



Trees/Shrubs 



$75,000 



Flowers 

 37,000 



BhI^ Goods 

 53,000 



24,000 



2,500 

 2,500 



8,000 

 21% 



APRIL 8. MAY 1997 



