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The gross margin ratio is computed by dividing the company’s
gross profit dollars by its net sales dollars.
Ex: Let’s assume that a company has net sales of $800,000
and its cost of goods sold is $600,000. This means its gross
profit is $200,000 (net sales of $800,000 minus its cost of
goods sold of $600,000) and its gross margin ratio is 25%
(gross profit of $200,000 divided by net sales of $800,000).
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