Adjusted Gross Margin


DEFINITION of '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

  1. Gross Profit

    A company's total revenue (equivalent to total sales) minus the ...
  2. Cost Of Revenue

    The total cost of manufacturing and delivering a product or service. ...
  3. Average Age Of Inventory

    The average number of days it takes for a firm to sell to consumers ...
  4. Cost Of Goods Sold - COGS

    Cost of goods sold (COGS) are the direct costs attributable to ...
  5. Shrinkage

    The loss of inventory that can be attributed to factors including ...
  6. Percentage Change

    Percentage change is a simple mathematical concept that represents ...
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