Berry Ratio

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Berry Ratio
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The Berry Ratio- is defined as the ratio of gross profit to operating expenses[1]. The Berry ratio has its source in the late 1970s, it was named after Dr Charles Berry who developed this method[2]. Interest and external income are usually not included in gross profit, while depreciation may or may not be belonged in operating expenses[3].

\(Berry Ratio = \frac{Gross Profit}{Operating Expenses}\)

Use of the Berry Ratio

The Berry ratio has been featured in many articles. It is used quite rarely due to its complexity[4]. Lang M., Cottani G., Petruzzi R. and Storck A. in their book they write that "Largely viewed as a variant of the cost plus method, it can have quite a significant impact on the profitability of a tested party compared to the operating margin."[5]. Therefore, caution is advised when using the Berry ratio in practice.

To apply the Berry Ratio, three conditions must be satisfied[6]:

  • The value of the functions performed in the controlled transaction (both the assets used and the risks assumed are taken into account) is proportional to the operating expenses.
  • The value of the functions performed in the controlled transaction (as before taking into account the risks assumed and assets used) is not importantly affected by the value of the products distributed (is not proportional.
  • The taxpayer does not perform any other meaningful function in the controlled transaction. Which should be remunerated using another financial indicator or method.

There are situations in which the Berry ratio can be very helpful and useful. This applies primarily to the activities of intermediaries, during which the taxpayer purchases goods from a related enterprise and resells to other related enterprises. In this situation, the resale price method may not apply due to the lack of uncontrolled sales. Moreover, the cost-plus method, which gives for a mark-up on the cost of goods sold, may also not apply if the cost of goods sold consists of controlled purchases. The operating costs at the intermediary can be reasonably independent of the formulation of transfer prices. Unless they are significantly affected by controlled transaction costs (for example rental charges, head office charges) paid to related enterprises[7].


  1. Przysuski M., Lalapet S. 2005
  2. Eden L., Zakrevska T. 2017
  3. OECD 2017
  4. Lang M., Cottani G., Petruzzi R., Storck A. 2018
  5. Lang M., Cottani G., Petruzzi R., Storck A. 2018
  6. OECD 2017
  7. OECD 2017


Author: Justyna Siudy