Formula to Calculate Gross Profit

The gross profit formula is calculated by subtracting the cost of goods sold from the net sales, where Net Sales are calculated by subtracting all the sales returns, discounts, and the allowances from the Gross Sales, and the Cost Of Goods Sold (COGS) is calculated by subtracting the closing stock from the sum of opening stock and the Purchases Made During the Period.

Gross profitGross ProfitGross Profit shows the earnings of the business entity from its core business activity i.e. the profit of the company that is arrived after deducting all the direct expenses like raw material cost, labor cost, etc. from the direct income generated from the sale of its goods and services.read more is the profit that the business makes by selling its goods to its consumers after deducting the costs associated with it while making those products or the costs associated while providing those services. One can find a Gross profit figure on the firm’s profit and loss statementFirm’s Profit And Loss StatementThe profit and loss statement is a financial report that summarizes the company’s revenues and expenses over a period of time to determine profit or loss for that period.read more, and the same can also be calculated by subtracting the COGS, which is the cost of goods soldCost Of Goods SoldThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more from sales or revenue.

The Equation for Gross Profit is:

You are free to use this image on you website, templates, etc., Please provide us with an attribution linkHow to Provide Attribution?Article Link to be HyperlinkedFor eg:Source: Gross Profit Formula (wallstreetmojo.com)

Steps to Calculate Gross Profit

To calculate Gross profit, one needs to follow the below steps.

  • Step 1: Find out the Net salesFind Out The Net SalesNet Sales is the total revenue of a Company after calculating the deductions for sales, returns, discounts, & allowances from its Gross Sales. It is determined by, Net Sales = Gross Sales – Returns – Allowances – Discounts.
  • read more or net revenue Net Revenue Net revenue refers to a company’s sales realization acquired after deducting all the directly related selling expenses such as discount, return and other such costs from the gross sales revenue it generated.read more that takes a total of gross sales and reduces the same by sales return.Step 2: Secondly, the cost of salesCost Of SalesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more includes all the variable costs the company incurs while making the product. Or delivering the services.Step 3: Gross profit formula would be to subtract the figure arrived in step 2 from step 1.

Examples

Example #1

ABC limited has given you the below details for their manufacturing financial details. You are required to calculate Gross Profit from the above details.

  • Revenue: 5950560.00Raw Materials: 11901012.00Labor Charges: 16066366.20Cost of Sales: 44628795.00

You are required to calculate Gross Profit from the above details.

Solution:

Calculation of gross profit can be done as follows –

We have the Revenue and Cost of sale, which is nothing but the cost of goods sold.

Hence, Gross Profit will be = 5,95,05,060 – 4,46,28,795

Note: The sales cost includes raw material and labor costs.

Example #2

An ltd and B ltd are two close competitors bidding in an auction to win the contract of $10 million. The bidding details are supposed to be kept secret. One of the key conditions for any of them to win the auction is that their gross profit figure should not be above 10% of the size of the contract. This condition has been kept secret. Else it would be easy for them to manipulate as the motive behind this is to capture the bidder’s honesty and keep the quality of goods intact with low margins. Both of the firms have submitted the below details at auction.

You must calculate the Gross margin and advise who could be the likely winner of the bid at this auction.

Calculation of cost of goods for A Ltd can be done as follows –

Cost of Goods Sold = Opening StockOpening StockOpening Stock is the initial quantity of goods held by an organization during the start of any financial year or accounting period. It is equal to the previous accounting period’s closing stock, valued in accordance with appropriate accounting standards based on the nature of the business.read more + Purchases – Closing Stock

=11200000 + 29750000 – 7000000

Cost of Goods Sold = 33950000

Calculation of GP for A Ltd can be done as follows –

Gross profit will be = 35000000 – 33950000

Calculation of cost of goods for B Ltd can be done as follows –

Cost of Goods = 147000000 + 31150000 – 11665500

Cost of Goods = 34184500

Calculation of GP for B Ltd can be done as follows –

Gross Profit will be = 35000000 – 34184500

The condition was that the gross profit should be 10% of the contractor’s size and 10% of $10 million, which is $10,00,000, and it appears B Ltd has more chances of winning the bid provided other conditions are also met.

Gross Profit Formula (with Excel Template)

VIP tv manufacturing is into the business of making smart android television. Therefore, an internal auditInternal AuditInternal audit refers to the inspection conducted to assess and enhance the company’s risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit.read more VIP tv manufacturing is into the business of making smart android television. Therefore, an

  • Sale of 32-inch Smart TV: 6,72,00,000.00Sale of 43-inch Smart TV: 10,69,82,400.00Return of 32-inch Smart TV: 69,35,040Return of 43-inch Smart TV: 1,05,59,162.88Purchases: 12,48,00,000.00Labor Charges: 1,28,00,000.00Material Charges: 80,00,000.00Net Inventory: 12,50,000.00

The auditor is interested in calculating the GP of the company. Therefore, you are required to calculate the gross profit of the company based on the above information.

Note: Net Inventory is opening stock minus closing stockClosing StockClosing stock or inventory is the amount that a company still has on its hand at the end of a financial period. It may include products getting processed or are produced but not sold. Raw materials, work in progress, and final goods are all included on a broad level.read more.

Gross Profit will be =156688197.12 – 146850000

You can refer to the given excel sheet below for the detailed calculation of gross profit.

Gross Profit Calculator

You can use the following Gross Profit Calculator

Relevance and Uses

  • It can also be called gross incomeGross IncomeThe difference between revenue and cost of goods sold is gross income, which is a profit margin made by a corporation from its operating activities. It is the amount of money an entity makes before paying non-operating expenses like interest, rent, and electricity.read more, and as stated earlier, the same can be calculated by subtracting the cost of goods sold from net sales or net revenue.GP shall only include variable costs, which will never account for the fixed costs.It will assess the business’s efficiency, like how it uses its supplies and labor to produce services or goods.The higher the gross profit ratio to sales, the more efficient the business will attract competition.

This has been a guide to Gross Profit Formula. Here we discuss how to calculate gross profit using its formula, examples, and downloadable excel template. You can learn more about financial analysis from the following articles –

  • Profit FormulaProfit FormulaThe profit formula evaluates the net gain or loss of an organization in a particular accounting period. It is computed as the difference between the total sales revenue and the overall expenses incurred by the company.read moreCalculate Gross Profit PercentageCalculate Gross Profit PercentageGross profit percentage is used by the management, investors, and financial analysts to know the economic health and profitability of the company after accounting for the cost of sales. Gross profit percentage formula = Gross profit / Total sales * 100%
  • read moreOperating Profit vs Net ProfitOperating Profit Vs Net ProfitOperating profit is derived from gross profit and is the income left after deducting all expenses and costs incurred in the operation of the business. Net profit, on the other hand, is the remaining income after accounting for all cash flows, which can be positive or negative.read moreEconomic Profit DefinitionEconomic Profit DefinitionEconomic profit refers to the income acquired after deducting the opportunity and explicit costs from the business revenue (i.e., total income minus overall expenses). It is an internal analysis metric used by the organizations along with the accounting profits.read more