Gross Profit Percentage

Gross profit percentage is the formula which is used by the management, investors and financial analysts to know the financial health and profitability of the company after accounting for the cost of sales and is calculated by dividing the gross profit of the company by its net sales.

What is the Gross Profit Percentage?

Gross Profit Percentage is a measure of profitability that calculates how much of every dollar of revenue is left over after paying off the cost of goods sold (COGS). In other words, it measures the efficiency of a company in utilizing its input costs of production, such as raw materials and labor, in order to produce and sell its products profitably.

It can be seen as the percentage of sales that exceeds the direct costs associated with manufacturing the product. These direct costsDirect CostsDirect costs are costs incurred by an organization while performing its core business activity and can be attributed directly in the production cost, such as raw material costs, wages paid to factory staff, power & fuel expenses in a factory, and so on, but do not include indirect costs such as advertisement costs, administrative costs, etc.read more or COGSCOGSThe 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 primarily consist of raw materials and direct labor. Calculation of the gross profit percentage formulaProfit Percentage FormulaThe profit percentage formula calculates the financial benefits left with the entity after it has paid all the expenses. Profit percentage is of two types - markup expressed as a percentage of cost price or profit margin calculated using the selling price.read more is done by dividing the gross profit by the total sales and expressed in percentage terms.

Gross Profit Margin Formula

The gross profit percentage formula is represented as,

Gross profit percentage formula = Gross profit / Total sales * 100%
Gross-profit-percentage-formula

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For eg:
Source: Gross Profit Percentage (wallstreetmojo.com)

It can be further expanded as,

Gross profit percentage formula = (Total sales – Cost of goods sold) / Total sales * 100%

The money that is remaining after covering the COGS is used to service other operating expenses like selling/commission expense, general & administrative expenses, research & development, marketing expense, and interest expense that appear further below in the income statement. As such, the higher it is, the better it is for a company to pay off the operating expenses of the business.

Steps to Determine Gross Profit Percentage

The calculation of gross profit percentage formula can be simply done by using the following steps:

  1. Firstly, note the total sales of the company, which is easily available as a line item in the income statement.

  2. Next, either gather the COGS directly from the income statement or compute the COGS by adding the direct costs of manufacturing, such as raw materials, labor wages, etc.

  3. Next, the gross profit is calculated by deducting the COGS from the total sales.


    Gross profit = Total sales – COGS;

  4. Finally, it is calculated by dividing the 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 by the total sales, as shown below. It is expressed in percentage, as the name suggests.

    Gross profit percentage formula = (Total sales – Cost of goods sold) / Total sales * 100%

Gross Profit Percentage Examples

Let’s understand the concept with the help of a simple example to understand it better.

Example #1

Let us consider an example of a company called XYZ Limited for doing the calculation of gross profit. XYZ Limited is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, XYZ Limited has earned $150,000 in total net sales along with the following expenses.

As per the question, Based on the below information, we will do the calculation of the gross profit percentage for XYZ Limited.

Gross Profit Percentage eg1

By using the above data, we will first calculate the Cost of Goods Sold(COGS)

  • COGS = Labour wages + Raw materials expense + Factory rent
  • = $50,000 + $25,000 + $5,000
Gross Profit Percentage eg1.1png

COGS= $80,000

[Only those costs are taken in the computation of COGS which can be directly allocated to the production]

Now, we will calculate the Gross Profit by using data given,

  • Gross profit = Total sales – COGS
  • = $150,000 – $80,000
Gross Profit Percentage eg1.2png

Gross profit = $70,000

Therefore, the calculation of gross profit percentage for XYZ Limited will be

  • Gross profit percentage formula = Gross profit / Total sales * 100%
  • = $70,000 / $150,000 * 100%
Gross Profit Percentage eg1.3png

XYZ Limited’s GPP for the year is as follows

Gross Profit Percentage eg1.5png

XYZ Limited’s gross profit % for the year stood at 46.67%.

Example 2

Let us take the example of Apple Inc. For the gross profit percentage calculation for the fiscal year 2016, 2017, and 2018.

As per the annual reports, the following information is available:

Based on the below information, we will do the calculation of Apple Inc. for the years 2016, 2017, and 2018.

Gross Profit Percentage eg1.4png

By using the above data, we will first calculate the gross profit of Apple Inc. for the year 2016,

  • Gross profit for 2016 = Net sales (2016) – Cost of sales (2016)
  • = $215,639 – $131,376
Gross Profit Percentage eg2 png
  • Gross profit for 2016 = $84,263
  • Gross profit for 2017 = $229,234 – $141,048
Gross Profit Percentage eg2 .1png
  • Gross profit for 2017= $88,186
  • Gross profit for 2018 = $265,595 – $163,756
Example 2 .2png

Gross profit for 2018= $101,839

Now we will, do the calculation of gross profit % of Apple Inc. for the year 2016

  • GPP for 2016 = Gross profit (2016) / Net sales (2016) * 100%
  • = $84,263 / $215,639 * 100%
Example 2 .3png

GPP for 2016= 39.08%

Therefore, the calculation of the gross profit % of Apple Inc. for the year 2017 will be

  • GPP for 2017 = $88,186 / $229,234 * 100%
Example 2.4png

GPP for 2017= 38.47%

Therefore, calculation of Gross profit % of Apple Inc. for the year 2018 will be

  • GPP for 2018 = $101,839 / $265,595 * 100%
Example 2 .5png

GPP for 2018 = 38.34%

Therefore, the calculation of the gross profit percentage of Apple Inc. for 2016, 2017 and 2018 stood at 39.08%, 38.47% and 38.34% respectively.

Relevance and Uses

Gross Profit Percentage Video

This has been a guide to what is Gross Profit Percentage and its definition. Here we calculate gross profit percentage using its formula along with practical examples. You may learn more about our articles below on accounting –

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