Gross Profit Formula

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 is 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 which the business makes by selling its goods to its consumers and after deducting the costs that are associated with it that is while making those products, or the costs that are 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 that 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:

Gross Profit = Net Revenue – Cost of Goods Sold
Gross-Profit-Formula

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Source: Gross Profit Formula (wallstreetmojo.com)

Steps to Calculate Gross Profit

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

Examples

You can download this Gross Profit Formula Excel Template here – Gross Profit Formula Excel Template

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: 5950560.00
  • Raw Materials: 11901012.00
  • Labor Charges: 16066366.20
  • Cost 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 –

Example 1.1

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

Gross Profit Formula Example 1.2
Note: The cost of sales is inclusive of raw material and labor costs.

Example #2

An ltd and B ltd are two close competitors and are bidding in an auction for winning 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 then 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 honesty of the bidder and also to keep the quality of goods intact with low margins. Both of the firms have submitted the below details at auction.

ParticularsA Ltd.B Ltd.
Sales35000000.0035000000.00
Opening Stock11200000.0014700000.00
Closing Stock7000000.0011665500.00
Purchases and Other Expenses29750000.0031150000.00
You are required to calculate the Gross margin and advise who could be the likely winner of the bid at this auction.

Solution:

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

Gross Profit Formula Example 2.0.1

=11200000 + 29750000 – 7000000

Cost of Goods Sold = 33950000

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

Example 2.0.2

Gross Profit will be = 35000000 – 33950000

Gross Profit Formula Example 2.3

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

Example 2.4

Cost of Goods = 147000000 + 31150000 – 11665500

Cost of Goods = 34184500

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

Example 2.5

Gross Profit will be = 35000000 – 34184500

Gross Profit Formula Example 2.6

The condition was that the gross profit should be 10% of the size of the contractor less and which is 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. 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 has been undergoing for their manufacturing process. The production head department and sales department provide the below details to the auditor.

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

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

Solution:

Calculation of gross profit can be done as follows –
Gross Profit Formula Example 3.1

Gross Profit will be =156688197.12 – 146850000

Example 3.2

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

Net Revenue
Cost of Goods Sold
Gross Profit Formula
 

Gross Profit Formula = Net Revenue Cost of Goods Sold
0 0 = 0

Relevance and Uses

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