Formula of Gross Profit (Table of Contents)
What is Gross Profit Formula?
Gross profit 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 statement and the same can also be calculated by subtracting the COGS that is the cost of goods sold from sales or revenue.
The Equation for Gross Profit is:
To calculate Gross profit, one needs to follow the below steps.
Step1: Find out the Net sales or net revenue figure of the company that takes a total of gross sales and reduce the same by sales return.
Step2: Secondly, find out what is the cost of sales which includes all the variable cost that company made while making the product or delivering the services.
Step3: Gross profit formula would be to subtract the figure arrived in step 2 from step 1.
Examples of Gross Profit Formula
Let’s see some simple to advanced examples to understand it better.
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ABC limited has given you the below details for their manufacturing financial details. You are required to calculate Gross Profit from the above details.
You are required to calculate Gross Profit from the above details.
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
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.
Calculation of cost of goods for A Ltd can be done as follows –
=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 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 audit has been undergoing for their manufacturing process. The production head department and sales department provide below details to the auditor.
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.
Gross Profit Formula Calculator
You can use the following Gross Profit Formula Calculator
|Gross Profit Formula =||Net Revenue – Cost of Goods Sold|
|0 – 0 =||0|
Relevance and Uses
- It can also be called gross income, 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 those costs which are variable in nature and it will never account for the fixed costs.
- It will assess the business’s efficiency like how it is using its supplies and labor in producing services or goods.
- The higher the ratio of gross profit to sales the efficient the business is and will attract competition.
This has been a guide to Gross Profit Formula. Here we discuss how to calculate gross profit using its formula along with examples and downloadable excel template. You can learn more about financial analysis from the following articles –