Here's an issue I recently analyzed ... let's say an item costs $50 and the cost of goods sold are $30, netting the brand a $20 gross margin on the item.
Second issue ... the item costs $50 and the cost of goods sold are $30, but the brand sells the item for $40, leaving only $10 gross margin on the item.
Why do we care about the two issues above?
Well, past gross margins predict future gross margins. In other words, I created a regression equation for a brand where I had two independent variables (gross margin dollars, cost of goods dollars) and one dependent variable (future gross margin dollars). Here's what the equation said:
- Future Gross Margin Dollars = $12 + $0.55*(Past Gross Margin Dollars) + $0.06*(Past Cost of Goods Sold Dollars).
- $12 + $0.55*($20) + $0.06*($30) = $24.80.
- $12 + $0.55*($10) + $0.06*($30) = $19.30.