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Gross Profit Formula

Gross profit, also referred to as sales profit or gross income, represents a company’s profit after subtracting the costs associated with producing and selling its products or services. Gross profit is determined by subtracting the cost of goods sold (COGS) from the total revenue on a company’s income statement. The formula is: Gross Profit = Total Revenue – Cost of Goods Sold

In this article, we will learn about Gross Profit definition, Gross Profit formula, related examples, and others in detail.

Table of Content

What is Gross Profit?

Gross profit is a key financial term that shows how much money a company makes from selling its products after subtracting the costs of making those products. It helps understand how well a company is doing in its core business.

Gross-Profit-Formula

Gross Profit

Gross Profit Formula

The formula for gross profit equals the difference between revenue and cost of goods for a company. The value of revenue is equal to the difference between the sales and sales return. The cost of goods is given by the difference between the sum of opening stocks, purchases, direct expenses, direct labour, and the sum of purchase returns and closing stocks.

Gross Profit = Revenue – Cost of Goods Sold

where,

  • Revenue = Sales – Sales Return
  • Cost of Goods Sold = (Opening Stock + Purchases + Direct expenses + Direct labor) – (Purchase Returns + Closing Stock)

Example of Gross Profit Calculation

For example, suppose a company sells handmade candles and its financial for the year are:

  • Total Revenue from Sales: $100,000
  • Total Cost of Goods Sold: $60,000

Gross Profit = $100,000 – $60,000 = $40,000

So, the gross profit is $40,000.

Percentage of Gross Profit

Percentage of Gross Profit formulas are:

  • Percentage of Gross Profit = (Total Sale Revenue – Cost of Good Sold)/(Total Sale of Revenue)×100
  • Percentage of Gross Profit = (Gross of Fit)/(Total Sale of Revenue)×100

Gross Profit vs. Gross Profit Margin

Difference between Gross Profit and Gross Profit Margin is explained in the in tabular form added below:

Aspect Gross Profit Gross Profit Margin
Definition Total profit a company makes after subtracting the cost of goods sold (COGS) from total revenue. A profitability ratio that shows the percentage of revenue that exceeds the cost of goods sold (COGS).
Formula Gross Profit=Total Revenue−COGS Gross Profit Margin=(Gross ProfitTotal Revenue)×100%
Measurement Absolute Amount Percentage
Purpose Measures the total profit from core business activities Indicates the efficiency of production and pricing strategy
Example Calculation If total revenue is $500,000 and COGS is $300,000, then:

Gross Profit = $500,000 – $300,000 = $200,000

 If total revenue is $500,000 and COGS is $300,000, then:
Gross Profit Margin = ($500,000 – $300,000)/$500,000 × 100%
= 200,000/500,000 × 100%

= 40%
Importance Helps in understanding the absolute profitability from sales Helps in comparing profitability across different companies and industries

Why is Gross Profit Important?

Gross profit is important for several reasons:

  • Understanding Profitability: It shows how much money a company makes from its main business activities.
  • Pricing Strategy: Helps determine if the prices set for products are enough to cover production costs and make a profit.
  • Cost Management: Indicates how well a company is managing its production costs.
  • Business Decisions: Guides decisions on budgeting, cost control, and investments.

Examples on Gross Profit Formula

Example 1: Calculate the gross profit for revenue and cost of goods of ₹22000 and ₹12000 respectively.

Solution:

We have,

  • R = 22000
  • C = 12000

Using the formula we get,

G = R – C

= 22000 – 12000

= ₹10000

Example 2: Calculate the gross profit for revenue and cost of goods of ₹142000 and ₹120000 respectively.

Solution:

We have,

  • R = 142000
  • C = 120000

Using the formula we get,

G = R – C

= 142000 – 120000

= ₹22000

Example 3: Calculate the revenue for gross profit and cost of goods of ₹15000 and ₹40000 respectively.

Solution:

We have,

  • G = 15000
  • C = 40000

Using the formula we get,

G = R – C

=> R = G + C

= 15000 + 40000

= ₹55000

Example 4: Calculate the cost of goods for gross profit and revenue of ₹2000 and ₹23000 respectively.

Solution:

We have,

  • G = 2000
  • R = 23000

Using the formula we get,

G = R – C

=> C = R – G

= 23000 – 2000

= ₹21000

Example 5: Calculate the revenue for sales of ₹90000 and sales return of ₹80000.

Solution:

We have,

  • Sales = 90000
  • Sales Return = 80000

Using the formula we get,

R = Sales – Sales return

= 90000 – 80000

= ₹10000

Example 6: Calculate the gross profit for sales of ₹65000, sales return of ₹15000 and cost of goods ₹30000.

Solution:

We have,

  • Sales = 65000
  • Sales Return = 15000

Find the revenue value.

R = Sales – Sales return

= 65000 – 15000

= ₹50000

Given that, C = 30000.

Using the formula we get,

G = R – C

= 50000 – 30000

= ₹20000

Example 7: Calculate the gross profit for the data:

Parameters Value (in ₹)
Opening stocks  1000
Purchases 2000
Direct expenses 3000
Direct labor 4000
Purchase returns 1500
Closing Stocks 2500
Revenue 15000

Solution:

Calculate cost of goods from given data.

We have,

C = (Opening stock + Purchases + Direct expenses + Direct labor) – (Purchase returns + Closing Stock)

= (1000 + 2000 + 3000 + 4000) – (1500 + 2500)

= 10000 – 4000

= ₹6000

Given that, R = 15000.

Using the formula we get,

G = R – C

= 15000 – 6000he gross profit formula is: Gross Profit = Revenue – Cost of Goods Sold

= ₹9000

Practice Problems on Gross Profit Formula

Q1. Calculate the gross profit for revenue of ₹50,000 and COGS of ₹20,000.

Q2. Determine the revenue if the gross profit is ₹8,000 and the cost of goods sold is ₹12,000.

Q3. Find the cost of goods sold given a gross profit of ₹30,000 and revenue of ₹90,000.

Q4. Calculate the revenue for a gross profit of ₹25,000 and COGS of ₹75,000.

Q5. Determine the gross profit for sales of ₹100,000, sales return of ₹5,000, and COGS of ₹70,000.

Q6. Find the revenue if the gross profit is ₹18,000 and COGS is ₹32,000.

Q7. Calculate the cost of goods sold given a gross profit of ₹50,000 and revenue of ₹150,000.

Q8. Determine the gross profit for sales of ₹80,000 with a sales return of ₹10,000 and COGS of ₹50,000.

Q9. Calculate the revenue for a gross profit of ₹12,000 and a COGS of ₹48,000.

Q10. Find the gross profit for revenue of ₹200,000 and COGS of ₹120,000.

FAQs on Gross Profit Formula

How to Calculate Gross Profit?

Gross Profit is calculated using the formula is: Gross Profit = Revenue – Cost of Goods Sold

Why do we Calculate Gross Profit?

We calculate gross profit to determine how much money a company makes from its core business activities after covering the direct costs of producing its goods.

What is Net Profit and Gross Profit Formula?

Net profit is the total earnings of a company after all expenses, including operating costs, taxes, and interest, have been deducted from total revenue.

  • Gross Profit = Revenue – Cost of Goods Sold (COGS)
  • Net Profit = Revenue – Total Expenses

How is Gross Profit Margin Calculated?

Gross Profit Margin = (Gross Profit / Total Revenue) × 100%

What Does a High Gross Profit Margin Indicate?

A high gross profit margin indicates that a company is efficient in managing its production costs and pricing strategies.


 


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