What Is the Berry Ratio?
The Berry ratio compares a company's gross profit to its operating expenses. This ratio is used as an indicator of a company's profit in a given period. A ratio coefficient of 1 or more indicates that the company is making a profit above all variable expenses, whereas a coefficient below 1 indicates that the firm is losing money.
The formula is as follows:
Berry Ratio=Operating ExpensesGross Margin
Understanding the Berry Ratio
The Berry ratio is named after Dr. Charles Berry, an American economics professor who developed the method as part of expert testimony during a 1979 transfer pricing court case between DuPont and the United States.
According to PricewaterhouseCoopers, the DuPont case involved a distributor which also performed related marketing services. When evaluating the performance of the distribution business, Berry compared the ratio of gross profit to operating expenses to third-party comparable companies’ ratios of gross profit to operating costs. He was able to evaluate the return the DuPont distributor earned on its purely value-adding distribution activities, though with an important underlying assumption that the costs of these activities were fully captured in the distributor’s operating expenses.
Since the early 1990s, the Berry ratio has been recognized in U.S. transfer pricing regulations. However, in practice, it has been little used. Most likely that is due to its long-time status as an unspecified method—considered by some as somewhat “shady”—and having been cited by some academics as being one of the most misused transfer pricing analysis ratios.