What is the first step in calculating margin?

The first step in calculating margin is to calculate gross profit by subtracting the cost of goods sold (COGS) from the selling price. This step is crucial because margin is fundamentally a measure of profitability, and gross profit represents the profit a company makes after accounting for the costs associated with producing or purchasing its products.

Understanding gross profit is essential because it lays the groundwork for further calculations, such as determining the margin percentage by dividing gross profit by revenue (which is a later step). The process begins with finding the difference between what customers pay (the selling price) and what the company incurs in costs associated with those products (the COGS). By establishing this key figure first, you can effectively assess the company’s profitability before moving on to additional calculations like margin ratios.

In contrast, determining the selling price or finding the cost of goods sold are steps that are necessary but come after calculating gross profit. While all these components are indeed important in the broader context of a financial analysis, the accurate sequence starts with determining gross profit as the foundational element in the calculation of margin.