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 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:
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. 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.that takes a total of gross sales and reduce the same by sales return.
- Step 2: Secondly, the cost of sales include all the variable cost that 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.
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.
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.
|Particulars||A Ltd.||B Ltd.|
|Purchases and Other Expenses||29750000.00||31150000.00|
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 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.
Calculation of gross profit can be done as follows –
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
|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 –