How the System Calculates Adjusted Margin

The adjusted margin percent takes into consideration the effect of inventory carrying costs on gross margin return on investment (GMROI). Carrying costs comprise taxes, insurance, and interest payments on the inventory. Your goal is to have an adjusted margin percent that covers your operating costs.

Many companies set a carrying cost percent at Prime + 20%. For example, if the prime lending rate is 8%, the carrying cost percent is 28%. For every dollar of inventory you stock over one year, it costs $.28.

The system calculates the adjusted margin percent as follows:

Step

Formula

  1. Multiply the dollars of on-hand inventory by the carrying cost for the product to obtain the dollars of carrying cost.

Carrying Cost $ = (Avg $ On-Hand * Carrying Cost %)

  1. Subtract the dollars of carrying cost from the actual dollars of gross profit to produce the adjusted dollars of gross profit.

Adjusted Gross Profit $ = (Actual Gross Profit $ - Carrying Cost $)

  1. Divide the adjusted dollars of gross profit by the actual dollars of sales to produce the adjusted margin percent.

Adjusted Margin % = (Adjusted Gross Profit $ / Sales $)

For example, if you apply a 28% carrying cost to the GMROI water heater example:

  1. Multiply 28% by the $500.00 average dollars on-hand inventory to get $140.00 of carrying cost.

  2. Next, subtract $140.00 from the $600.00 gross profit to get $460.00 adjusted gross profit.

  3. Finally, divide $460.00 by the total annual sales of $2600.00 to produce 17.15% adjusted margin percent.

See Also:

Gross Margin Return On Investment (GMROI) Overview