The portion of a company’s revenue left over after direct costs are subtracted.
For example, a furniture manufacturer generates $2 million in revenue and spends $1.1 million on direct materials and labour, leaving a gross margin of $900,000 or 45%. This margin must cover all other operating expenses — rent, salaries, marketing — and still leave profit.
Why it matters: It indicates the core viability of a product; a low gross margin means the business has little room to cover operating expenses or survive price wars.
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