Gross Profit Formula

Gross Profit Formula

Profit is the difference between revenue and expenses. It serves as a backbone for sustainability for a company or business. Hence, profit is therefore crucial to a business. Profit can be divided into two categories: gross profit and net profit. Students will learn Gross Profit in great detail along with formula and solved examples in this article of Gross Proift Formula that has been published on Extramarks.

Gross Profit Meaning

Gross Profit is the difference between total revenue and cost of items sold. It is the profit before any interest or tax obligations. It is also referred as “gross margin.” While calculating, Indirect revenues and costs are excluded from gross profit.

  • Indirect revenue, such as income from interest, rent, commission, etc., is not included in gross profit.
  • Similarly, we do not subtract any indirect costs like electricity costs, insurance, transport costs, etc. 
  • In Gross Profit, total sales during a specific time period are calculated.
  • The total costs of labour and materials used to produce the products and services that the company is selling are subtracted to arrive at the Gross Profit formula.

Gross Profit is the profit generated only by a company’s trading activity. Gross Profit helps the management and investors to understand how well a company can produce and market its goods. We can say that demonstrates the product’s profitability. 

Gross Profit Formula

We can calculate Gross Profit using the following formula

Gross Profit = Revenue – Cost of goods sold 

Where, 

  • Revenue = Sales – Sales Return
  • Cost of goods sold = (Closing Stock – Opening Stock + Purchases – Purchase returns + Direct Expenses + Direct Labor) 

Gross Profit Ratio Formula

Gross Profit Ratio is a financial statistic that assesses the effectiveness and success of a corporation. We can determine Gross Profit Ratio by dividing the gross profit amount by the total net sales

The formula for calculating the gross profit ratio is

Gross Profit Ratio = Gross Profit/Revenue

By multiplying the result by 100, the Gross Profit formula can also be stated in percentage form. Then it is referred to as the Gross Profit formula or gross profit percentage. 

Gross Profit Percentage

Gross profit percent represents the proportion of revenue that exceeds the cost of goods sold as a percentage of total revenue.

Gross Profit Percent = (Gross Profit/Revenue) x 100 

Gross Profit Margin

Gross profit margin, also known as gross margin, is a financial tool that measures the proportion of revenue that exceeds the cost of goods sold as a percentage of total revenue.

  • Gross Profit formula is likely the most crucial instrument used by firms to understand the overall profit margin over time.
  • In business, the Gross Profit formula is sometimes referred to as net profit margin, net profit ratio, or net margin. 
  • We can get profit margin by dividing net profit by sales. 
  • It is expressed as a percentage.
  • The higher the Gross Profit, the more successful the company will be.

Profit is the difference between net income and net sales. Profit margin formula is given as 

Profit Margin = (Net Profit / Net Revenue) X 100

Gross Profit Margin Formula

Gross Profit Margin formula is created by dividing the difference between revenue and cost of products sold by net sales.

Gross Profit Margin = (Gross Profit / Net Sales) X 100

here, 

Gross Profit = Revenue – Cost of Goods Sold equals gross profit.

Significance of Gross Profit Formula

Gross Profit formula is crucial since it informs investors of how financially sound a company is. This is true because a company with a healthy net profit could actually sustain for longer period.

  • Gross Profit formula helps cost accountants and management can create budgets and future forecasts.
  • In addition, regardless of the amount and number of sales, it aids investors in evaluating the margins or profits of two or more companies.
  • Thus, the investors may make an informed decision on which business to invest in with the help of the Gross Profit formula.

Examples on Gross Profit Ratio Formula

Example 1 

The total annual revenues of Flagtastic, a company that creates and manufactures flags, are $100,000. Their cost of goods sold for the same year was $43,000. As a result, the company’s gross profit may be determined by deducting the 43,000 from the 100.000, which yields a profit of $57.000. 

Solution: With the two components of the gross profit ratio formula in hand, we can determine its value by dividing the gross profit by the entire amount of sales. 

57.000/100.000=0.57 

Then, by multiplying it by 100, we may express it as a percentage: (0.57 X 100) = 57

The company’s gross profit margin is 57%, and its gross profit ratio is 0.43.

Example 2 

Fedora is a furniture company that generates net sales of $250,000 each year. They had a $112, 000 opening stock at the start of the year, and over the course of the year, they bought raw materials totalling $54,000. Additionally, they spent $9,000 on different costs. They still possessed stock in the amount of $23,000 at the conclusion of the year. 

Solution: Calculating the cost of goods sold is the first step. 

112.000+54.000+9.000-23.000=152.000 

The cost of items sold is subtracted from the total net sales to determine gross profit. 

250.000-152.000 = 98.000 

Finally, by using its formula, we can determine the gross profit ratio. 

98.000/250.000=0.39

So Gross Profit Margin is 0.39 X 100 = 39 

The business’s gross profit margin is 39 per cent, and its gross profit ratio is 0.39.

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FAQs (Frequently Asked Questions)

1. What is meaning of gross profit?

Gross profit is the amount of money a company generate by selling its products or services, excluding the cost of producing or acquiring those products or services

2. How do you calculate gross profit?

You can calculate gross profit by using the formula gross profit = revenue – cost of goods sold

3. What is net profit?

Net profit is total revenue minus total expenditure