Gross profit of a business is the total amount of revenue they made after excluding the costs for manufacturing, selling and shipping services. In the income statement, we can see gross profit and can calculate it using the cost of goods sold and sales. How to calculate gross profit?
Through this part, we want to shed some light on the definition of gross profit and the formula of how to calculate gross profit to use the result to your own advantage.
The formula for gross profit is:
Sales revenue – Cost of Goods Sold = Gross Profit
The formula for gross margin is:
(Gross Profit/ Total sales revenue)*100 = Gross margin
- Sales revenue is the amount of profit earned by selling products and providing services to customers. This does not include returned items or discount offers.
- Cost of goods sold is the invested money in factoring a product. The process comprises buying materials, hiring labor work, etc. generally it is the final cost of a finished product plus additional shipping fees (if any). In short, COGS is the cost of a product when purchased from the original manufacturer.
- Gross margin is the percentage of gross profit, used as a metric to measure the ability of the business to cover the costs of goods solds with sales revenue. The higher the gross margin is, the more profitable the business is.
Fixed costs do not account for gross profit. They are the charges that will remain stable no matter how many products you have made or how many you have sold. Examples of fixed costs are rent for inventory, insurance, supplies for office workers, etc.
It is also worth noting that gross profit is not the same as operating profit. Operating profit does not include taxes and interests or EBIT. EBIT is generally called operating expenses and can be subtracted from gross profit to get operating profit.
