Define the Terms Gross Margin and Net Margin. Discuss Critically Their Respective Advantages and Disadvantages for Use in Business Analysis and Planning.

Topics: Costs, Variable cost, Fixed cost Pages: 2 (560 words) Published: April 30, 2013
Exam Answer
Question: Define the terms gross margin and net margin. Discuss critically their respective advantages and disadvantages for use in business analysis and planning.

The term Gross margin can be defined as the total revenue of a business or enterprise less the variable costs of that enterprise or business. It can be given in terms of per hectare in the case of crops and on a per head basis in livestock which can be derived from the totals. It is a good indicator of productive and economic efficiency. The term Net margin can be defined as the gross margin of a business or enterprise, as worked out by the above definition, less the total fixed cost which can be attributed to the business or enterprise. This can once again be given on a per hectare or per head basis. It is a good indicator of the true profitability of a business or enterprise. Advantages of Gross margins in business planning and analysis: * It can be used as an analysis tool to show how the business or enterprise has compared to previous years to show trends. For example it shows if the business or enterprise has improved productive efficiency over the past few years or not. * It can also be used as an analysis tool to benchmark the business or enterprise in comparison to similar systems showing if there could be room for improvement by improved productivity from enterprises. For example it can show if the farm is in the top or bottom 25% of farms. * It can be used as a planning tool to compare the gross margins of enterprises with similar fixed costs such as wheat, barley or OSR and aid in deciding which one to go with in the future. * It is also a great tool for preparing a budget for a bank loan when intending to embark on a new project.

Disadvantages of gross margins in business planning and analysis: * The major disadvantage of using gross margins as an analysis tool is that you cannot use it to compare the profitability of enterprises with different fixed costs...
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