![]() ![]() The gross profit margin may be improved by increasing sales price or decreasing cost of sales. It also shows that the company has more to cover for operating, financing, and other costs. A high gross profit margin means that the company did well in managing its cost of sales. Generally, the higher the gross profit margin the better. In terms of managing cost of sales and generating gross profit, the company did better in Year 1 than in Year 2. The cost of sales in Year 2 represents 78.9% of sales (1 minus gross profit margin, or 328/1,168) while in Year 1, cost of sales represents 71.7%. ![]() Nonetheless, the gross profit margin deteriorated in Year 2. Notice that in terms of dollar amount, gross profit is higher in Year 2. The gross profit margin for Year 1 and Year 2 are computed as follows: The gross profit margin uses the top part of an income statement. ![]()
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