Adjusted Gross Margin

What is an 'Adjusted Gross Margin'

A calculation used to determine the profitability of a product, product line or company. The adjusted gross margin includes the cost of carrying inventory, whereas the gross margin calculation does not take this into consideration. The adjusted gross margin, therefore, provides a more accurate look at the profitability of a product than the gross margin allows. The equation is as follows:


n Period Gross Profit Dollars – n Period Carrying Cost Dollars
n Period Sales Dollars

BREAKING DOWN 'Adjusted Gross Margin'

Adjusted gross margin goes one step further than gross margin because it includes these inventory carrying costs, which greatly affect the bottom line of a product's profitability. For example, two products could have identical, 25% gross margins. Each, however, could have different associated inventory carrying costs. Once these factors are included, the two products could show significantly different margins and profitability. This can help identify products and lines that are underperforming.


Inventory carrying costs include:
-Receiving and transferring inventory
-Insurance and taxes
-Warehouse rent and utilities
-Inventory shrinkage
-Opportunity cost

RELATED TERMS
  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the ...
  2. Gross Income

    1. An individual's total personal income, before accounting for ...
  3. Gross Profit Margin

    A financial metric used to assess a firm's financial health by ...
  4. Gross Margin Return On Investment ...

    An inventory profitability evaluation ratio that analyzes a firm's ...
  5. Gross Margin

    A company's total sales revenue minus its cost of goods sold, ...
  6. Marginal Profit

    Marginal profit is the profit earned by a firm or individual ...
Related Articles
  1. Entrepreneurship

    How Gross Margin Can Make or Break Your Startup

    Find out how your startup's gross margin can impact your business, including why a mediocre margin may spell disaster for a budding business.
  2. Taxes

    What is Gross Income?

    Gross income is an individual’s total income before taxes and other adjustments are considered.
  3. Markets

    A Look At Corporate Profit Margins

    Take a deeper look at a company's profitability with the help of profit margin ratios.
  4. Term

    The Difference Between Gross and Net Profit Margin

    To calculate gross profit margin, subtract the cost of goods sold from a company’s revenue; then divide by revenue.
  5. Professionals

    Goals Of Financial Management

    Find out the goals that all businesses have in common.
  6. Fundamental Analysis

    The Gross Margin

    A business's "gross margin" is a rough gauge of how profitable its operations are. It measures how much sales revenue the company retains after all of the direct costs associated with making ...
  7. Entrepreneurship

    What’s a Good Profit Margin for a New Business?

    Surprisingly, the younger your company is, the better its numbers may look.
  8. Markets

    Profitability Indicator Ratios: Profit Margin Analysis

    By Richard Loth (Contact | Biography)In the income statement, there are four levels of profit or profit margins - gross profit, operating profit, pretax profit and net profit. The term "margin" ...
  9. Entrepreneurship

    What's a Good Profit Margin for a Mature Business?

    How to determine if the amount you clear dovetails with the competition.
  10. Professionals

    Operating Profitability Ratios

    CFA Level 1 - Operating Profitability Ratios. Operating profitability looks at two forms of ratios. This section covers the return on sales measurements, such as EBITA and profit margin.
RELATED FAQS
  1. What is the difference between gross margin and gross profit?

    Understand the difference in definitions between gross margin and gross profit, and learn what each represents as a metric ... Read Answer >>
  2. What are the differences between gross profit and gross margin?

    Learn how gross profit and gross margin are calculated and how each is used in fundamental analysis. Generally, these numbers ... Read Answer >>
  3. What is the difference between revenue and cost in gross margin?

    Discover the differences between revenue and cost in gross margin, along with an explanation of various measures of profitability. Read Answer >>
  4. What is the difference between gross profit margin and operating profit margin?

    Understand the difference between gross profit margin and operating profit margin, two measures of corporate profitability ... Read Answer >>
  5. What are the main reasons for why there could be a negative gross profit margin and ...

    Find out how to calculate a company's gross profit margin, why a firm might experience a negative margin and how to interpret ... Read Answer >>
  6. What is the difference between operating margin and gross margin?

    Discover the main differences between operating margin and gross margin, and how investors and analysts interpret each differently. Read Answer >>
Hot Definitions
  1. Law Of Demand

    A microeconomic law that states that, all other factors being equal, as the price of a good or service increases, consumer ...
  2. Cost Of Debt

    The effective rate that a company pays on its current debt. This can be measured in either before- or after-tax returns; ...
  3. Yield Curve

    A line that plots the interest rates, at a set point in time, of bonds having equal credit quality, but differing maturity ...
  4. Stop-Limit Order

    An order placed with a broker that combines the features of stop order with those of a limit order. A stop-limit order will ...
  5. Keynesian Economics

    An economic theory of total spending in the economy and its effects on output and inflation. Keynesian economics was developed ...
  6. Society for Worldwide Interbank Financial Telecommunications ...

    A member-owned cooperative that provides safe and secure financial transactions for its members. Established in 1973, the ...
Trading Center