Gross Profit Formula

Every business works for profit. Profit is the excess of revenue over expenditure. It is a perimeter by which the success and the sustainability of a business are measured. A business or an organization that does not earn profits or incurs losses cannot survive.  Thus, profit is of utmost importance in a business. We can classify profit as Gross profit and Net profit. But, here let us discuss the Gross Profit formula with solved examples in detail. Let’s get started!

                                                                                                                                                Source:  pexels.com

Gross Profit Formula

What is Gross profit?

Gross profit is the amount of total revenue minus cost of goods sold. It is the amount of profit before all interest and tax payments. It is also known as gross margin. Gross profit does not include indirect incomes and expenses. In other words, it is the profit purely from the trading activities of a firm.

The gross profit depicts to the management as well as investors how well a business can manufacture and sell the products. Thus, we can say that it shows the profitability of the product.

The gross profit ratio is vital as it gives investors an understanding of how healthy financially a company is. This is so because a company showing a good net profit may actually be dying. A deep study may reveal that it is not earning profits from its core activities i.e. from buying and selling goods rather than the other sources of income.

Gross profit does not include indirect revenue i.e. income from interest, rent, commission, etc. Similarly, we do not deduct any indirect expenses also such as electricity charges, insurance, travel expenses, etc.

The gross profit concept also helps the cost accountants and the management in creating budgets and future forecasts. It also helps the investors in comparing the margins or profits of two or more companies irrespective of their size and sales volume. The investors can thus wisely choose which company or firm to invest.

Gross Profit Formula

Gross Profit = Revenue – Cost of goods sold

Where,

Revenue = Sales – Sales return

Cost of goods sold = Opening stock + Purchases –Purchase returns + Direct expenses + Direct labor – Closing Stock.

Percentage of Gross profit

Percentage of gross profit = \(\frac{Total sales or revenue – Cost of goods sold}{Total sales or revenue}\) x 100

Or

Percentage of gross profit = \(\frac{Gross profit}{Total sales or revenue}\) x 100

Solved Examples

Q.1. The purchase cost of a car is ₹500000. The owner sells it for ₹600000. Find the amount of gross profit.

Ans. Gross profit = Revenue –Cost of goods sold

= 600000 – 500000

= 100000

Q.2. The cost of raw materials is ₹10000, the cost of labor is ₹2000, the sales of the firm are ₹15000. Find Gross profit.

Ans. Gross profit = Total sales – Cost of goods sold

= 15000 – 12000

= ₹3000

Cost of goods sold = cost of raw material + cost of labor

= 10000 + 2000

=₹ 12000

Q.3. Gross profit is ₹50000 and total revenue is ₹60000. Find the percentage of gross profit.

Ans. Percentage of gross profit = \(\frac{Gross profit}{Total sales or revenue}\) x 100

= \(\frac{50000}{60000}\) x 100

= 83.33%