Gross Profit Formula
The gross profit formula gives the pure trading profit. We can simply say that profit is the excess of revenue over expenditure. We get the gross profit after the deduction of goods' selling cost from the revenue. Gross profit is also termed gross margin. It excludes the direct income and the expenses. Profitability can be shown by calculating the gross profit using the gross profit formula.
Meaning of Gross Profit Formula
Gross profit is the money or profit that a company makes after the selling cost and receiving cost is deducted. It is the amount of profit before all interest and tax payments. The gross profit is shown in a company's income statement and the formula used to calculate the gross profit of a company we need the cost of the goods sold and the revenue earned from the sales of these goods. The gross profit does not include fixed costs such as rent, insurance, salaries, etc. But the gross profit formula includes the cost of material used, credit card fees of customers, equipment, etc. Hence, the formula for calculating the gross profit is:
Gross Profit = Revenue - Cost of goods sold
Where,
Revenue = Sales - Sales return
Cost of goods sold = (Opening stock - Closing Stock) + (Purchase - Purchase Returns) + Direct Expenses + Direct Labour
Gross Profit Formula
To calculate the gross profit of a company by using the formula, here is a step-wise procedure:
- Step 1: Find out the net revenue that talks about the total gross sale
- Step 2: Determine the cost of sales that the company has achieved on variable cost
- Step 3: Use the gross profit formula to find out the total gross profit i.e Gross Profit = Revenue - Cost of goods sold
Gross Profit Margin Formula
The gross profit margin is the gross profit over the revenue. The gross profit margin helps in measuring a company's efficiency in production over a period of time. While the gross profit is the money, the gross profit margin is the percentage. Gross profit margin is also important since the gross profit might rise while the margin falls. Hence it is important to calculate both the gross profit margin and the gross profit for better clarity. Therefore, the formula to calculate the gross profit margin is:
Gross Profit Margin = (Revenue - Cost of goods sold)/Revenue
Example Using Gross Profit Formula
Example 1: A seller purchases a car at $60,000. If he sold it for $65,000, find his gross profit.
Solution:
Given: Revenue = $65,000
Cost of goods sold = $60,000
Now, using the gross profit Formula:
Gross profit = Revenue - Cost of goods sold
Gross Profit = 65,000 - 60,000
Gross Profit = $5000
Therefore, the gross profit is $5000
Example 2: The cost of a motorbike is $1000. The additional labor cost is $200. If the motorbike was sold at $1600, find the gross profit.
Solution: Given: Revenue = $1000
Cost of goods sold = 1000 + 200 = $1200
Now, using the gross profit formula:
Gross profit = Revenue - Cost of goods sold
= 1600 - 1200
= 400
Therefore, the gross profit is $400
Example 3: How to calculate gross profit and the gross profit margin, using Ferrari Co.'s 2016 annual income statement:
Revenue | Amount in USD |
Automotive | 213,532 |
Financial Services | 15,793 |
Total | 229,325 |
Costs and Expenses | |
Automotive Cost of Sales | 156,980 |
Financial services | 10,450 |
Total | 167,430 |
Solution: Given,
Revenue = 229,325
Costs of goods sold = 167,430
To find the gross profit, let's use the gross profit formula:
Gross Profit = Revenue - Cost of goods sold
Gross Profit = 229,325 - 167,430
Gross Profit = $61,895
To find the gross profit margin, we use the formula:
Gross Profit Margin = (Revenue - Cost of goods sold)/Revenue
Gross Profit Margin = 61,895/229325
Gross Profit Margin = 26.99%
FAQs on Gross Profit Formula
What is Gross Profit Formula?
The gross profit formula is used to determine a company's gross profit for a financial year. The gross profit formula needs the revenue earned for that year by a company and the cost of the goods sold for that year in the company. Fixed costs are not included in the gross profit formula but only the variable costs incurred by the company.
What is the Formula to Calculate the Gross Profit?
The formula to calculate the gross profit of a company is:
Gross Profit = Revenue - Cost of goods sold
where,
Revenue = Sales - Sales return
Cost of goods sold = (Opening stock - Closing Stock) + (Purchase - Purchase Returns) + Direct Expenses + Direct Labour
What is the Formula to Calculate the Gross Profit Margin?
The gross profit margin is calculated along with the gross profit incurred by a company. The gross profit margin is the percentage of the profit that the company has seen in a year. The formula to calculate the gross profit margin is:
Gross Profit Margin = (Revenue - Cost of goods sold)/Revenue
Find the Gross Profit of a House purchased at $2,360,000 and sold at $2,125,000.
Given, Revenue = $2,360,000 and Cost of goods sold = $2,125,000
Now, using the gross profit Formula:
Gross profit = Revenue - Cost of goods sold
Gross Profit = 2,360,000 - 2,125,000
Gross Profit = $235000