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How to Find Gross Profit: Definition and Calculation

Gross Profit is the income a business has left, after paying all direct expenses related to the manufacturing of a product. Gross Profit = Revenue – Cost of Goods Sold.

Here’s What We’ll Cover:

What Is the Formula for Gross Profit?

How Do You Calculate Gross Profit Margin?

Why Is Gross Profit Important?

What’s the Difference Between Net and Gross Profit?

What Is the Formula for Gross Profit?

The formula for gross profit is as follows:

Gross Profit = Revenue – Cost of Goods Sold

Revenue

This is the amount of money generated from the sale of a product during a specific time period. The amount is before any deductions.

Cost of Goods Sold

Cost of Goods Sold (or COGS) are direct costs associated with producing a product. They include:

  • Depreciation
  • Factory overhead
  • Labor
  • Materials
  • Storage

COGS does not include administrative or marketing charges.

Let’s use an example of a company calculating its gross profit.

Garry’s Glasses is a manufacturer of high-end sunglasses. The company is headquartered in San Diego. Garry’s sunglasses are shipped all over California to a variety of stores. The company has been in business for one year, and now that he’s doing the year end finances, Garry wants to calculate his gross profit.

Garry first determines the company’s revenue (this is the amount of money his company has made, without any deductions like how much it costs to make the sunglasses) to be $850,000.

Garry then looks at calculating his COGS, or cost of goods sold. This includes all the material he needed to buy in order to make the sunglasses, as well as the labor to make them. There are other cost considerations too (as listed above in the COGS definition). COGS for Garry’s Glasses for the year turns out to be $650,000.

Garry knows the formula for Gross Profit is:
Gross Profit = Revenue – Cost of Goods Sold
Or, in his case:
Gross Profit = $850,000 – $650,000
=$200,000

Garry’s Glasses has realized a gross profit of 200k.

How Do You Calculate Gross Profit Margin?

Gross Profit Margin (also known as “gross margin”) is simply gross profit, expressed as a percentage.

Gross Profit Margin = (Revenue – Cost of Goods Sold)/Revenue x 100

In the case of Garry’s Glasses, the calculation would be:
Gross Profit Margin = ($850,000 – $650,000)/$850,000 x 100
=24% margin

The gross profit margin for Garry’s Glasses is 24%. To recap, this is the percentage of revenues that remain after deducting cost of goods sold.

Why Is Gross Profit Important?

Gross profit is important for a company’s accounting because it deals specifically with cost of goods sold. In other words, the data generated can reflect how efficient a company’s management is when it comes to the purchasing of supplies, allocation of labor or decisions regarding the plant or location where the product is being produced.

What’s the Difference Between Net and Gross Profit?

Gross Profit is the income a business has left, after paying all direct expenses related to the manufacturing of a product.

Net Profit is what’s left after deducting all other expenses too, such as general, administrative and non-operating expenses. These other expenses are known as “fixed costs”. Fixed costs are costs that don’t change or change very little, over time. Fixed costs include:

  • Advertising
  • Amortization
  • Depreciation
  • Dues
  • Equipment leases
  • Insurance
  • Interest charges on loans
  • Property Taxes
  • Rent
  • Staff salaries
  • Subscriptions
  • Utilities

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