Gross Profit Formula
Gross Profit Formula
Every company strives to be profitable. Profit is the difference between revenue and expenses. It serves as a yardstick by which a company’s success and viability are evaluated. A company or organisation cannot thrive if it experiences losses or neither profits nor losses. Profit is therefore crucial to a business. Profit can be divided into two categories: gross profit and net profit. However, students can explore the Gross Profit formula in great detail with solved examples in the article that has been published on the Extramarks website and mobile application for student reference.
Introduction to Gross Profit Formula
The difference between total revenue and cost of items sold is the Gross Profit formula. The Gross Profit formula is the profit before any interest or tax obligations. It also goes by the name “gross margin.” Indirect revenues and costs are excluded from gross profit. In other words, it is the profit generated only by a company’s trading activity.
The Gross Profit formula shows management and investors how well a company can produce and market its goods. As a result, students can claim that it demonstrates the product’s profitability.
The 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 be on its last legs.
Indirect revenue, such as income from interest, rent, commission, etc., is not included in gross profit. In a similar vein, we do not subtract any indirect costs like electricity costs, insurance, transport costs, etc.
The cost accountants and management can create budgets and future forecasts with the help of the Gross Profit formula. 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.
Gross Profit Formula
Gross Profit = Revenue – Cost of goods sold
Where,
Sales minus Sales Return equals revenue.
The cost of goods sold is calculated as follows: Closing Stock – Opening Stock + Purchases – Purchase returns + Direct Expenses + Direct Labor.
Gross profit percentage equals total sales or revenue minus the cost of goods sold.
𝑇𝑜𝑡𝑎𝑙𝑠𝑎𝑙𝑒𝑠𝑜𝑟𝑟𝑒𝑣𝑒𝑛𝑢𝑒 x 100
Or
Gross profit Total Sales Or Revenue x 100 equals the percentage of gross profit.
Gross Margin Formula / Gross Profit Margin Formula
The profitability of a product or business is determined using the Gross Profit formula. The 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.
The result of dividing net profit by sales is the profit margin. Small businesses frequently use the words profit margin and Gross Profit formula to contrast similar industries. It’s expressed as a percentage. The higher the Gross Profit formula, the more successful the company will be.
The difference between net income and net sales is the Gross Profit formula. So, the following is the Gross Profit formula:
(Net Income / Net Sales) / 100 = Profit Margin
Formula for Gross Profit Margin
By dividing the difference between revenue and cost of products sold by net sales, the Gross Profit formula is created.
(Gross Profit / Net Sales) / 100 = Gross Profit Margin
Here,
Revenue – Cost of Goods Sold equals gross profit.
Gross Profit Ratio Formula
By dividing the gross profit amount by the total net sales, the Gross Profit formula (also known as the GP ratio) is a financial statistic that assesses the effectiveness and success of a corporation. 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.
The total sales during a specific time period are calculated, and 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.
Examples
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*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\s0.39*100= 39
The business’s gross profit margin is 39 per cent, and its gross profit ratio is 0.39.
