Gross profit margin measures the amount of money left over from revenue after the cost of goods sold, or COGS, has been subtracted. Businesses with more than one division or product category can report gross profit margin for each business unit separately, or they can combine the sales and COGS from all divisions into a single gross profit number. When all divisions are combined, the result is referred to as a "blended" gross profit margin. Understanding the distinguishing characteristics of blended gross profit margins can help you to evaluate the profitability of all your business models combined.
Gross profit margin takes a wide range of expenses out of the equation, including overhead, interest and taxes. Rather than acting as a measure of company profitability, gross profit margin specifically measures the soundness of different business models. The measure evaluates the raw profitability of sales by subtracting inventory, direct labor and freight costs from revenue. Thus, the blended gross profit margin measures the raw profitability of the specific combination of business units in a company. This can provide strategic insight for growing a small business that has multiple business units. Use the blended version of gross profit margin when you wish to analyze the effects of changes in one business unit on the soundness of the company as a whole.
Divisional Revenue and COGS
Adding the revenue from all divisions is the first step
in calculating blended gross profit margin. Choose a certain period for your calculations, and include all revenue from that period only. Calculating the cost of goods sold in multiple product divisions can be simple enough: Simply add the direct costs of all inventory sold in each division. However, adding a service division into the mix can complicate things. Consider a company that sells computer hardware and offers a separate tech-support service, for example. The hardware will have clear product costs, but no inventory will be involved in the service division. Include direct labor costs and any commissions paid to sales or service personnel in COGS for the service segments.
Other Profit Margins
Additional profit margins can provide deeper insight into the overall profitability of your business. The operating profit margin, for example, subtracts operating expenses, such as consumable supplies and utilities, as well as depreciation, from the gross profit margin. The net profit margin, as another example, compares the money left over after all expenses have been accounted for to the total sales revenue for the period, providing a final profit figure.
Profit Margin Formulas
With your total revenue and COGS in hand, use the following formula to calculate blended gross profit margin:
After accounting for all expenses, use the following formulas to calculate additional profit margins:
Operating margin = Operating Income / Total Sales
Net Margin = Net Income / Total Sales