How do you calculate gross profit?
This article explains how to calculate gross profit and the meaning of gross profit.
What is gross profit?
"Gross profit" in the income statement is the sales amount minus the cost of goods sold. It shows the profit obtained in the business. For manufacturing, the cost of production is deducted instead of the cost of goods sold.
Gross profit is the profit that indicates the value of goods and services and is the amount obtained by subtracting the cost of goods sold from the net sales on the income statement.
Gross profit is the primary source of profit and is the source of all the following profits. Therefore, if gross profit is not sufficient, operating income and ordinary income will not grow either.
How to calculate gross profit
Gross profit is calculated by subtracting the cost of goods sold from net sales.
The calculation formula of gross profit is as follows:
Gross profit = Sales - Cost of Goods Sold
Examples of gross profit calculation
For example, in the case of retail stores such as supermarkets, if a product with a cost of $200 sells 300 pieces for $250 and sells out, the gross profit will be $15,000 ($50 × 300 pieces). If gross profit is high, it is considered that profits have been raised smoothly in the business.
Gross profit = $250 * 300 - $200 * 300 = $50 x 300 = $15,000
The cost of goods sold is used to calculate gross profit, while manufacturing costs, including labor costs, are used.
In the retail business, labor costs are not included in the cost of goods sold because they are selling expenses. However, in the case of the manufacturing business, labor costs are included in the manufacturing cost.
Let's take a look at an example below:
For a shoe store that purchases ladies' shoes from a factory and sells them, if the purchase price of a pair of shoes with a selling price of $5,000 is $2,500, the gross profit on sales is $2,500.
Gross profit = Selling price - Purchase price
= $5,000 - $2,500 = $2,500
In the case of the shoe factory that wholesales products to the shoe store, the wholesale price is $3,000. If the cost of materials, labor, and expenses is $1,500, the gross profit on sales is $1,500.
Gross profit = Wholesale price - Cost of goods sold (materials, labor and expense)
= $3,000 - $1,500 = $1,500
Gross profit is one of the five profits in the income statement, and it is the source of operating income and ordinary income.
Whether you can earn a lot of gross profit or not is a major factor in management. If you buy products at a low price and sell them at a high price, your gross profit will increase; if you keep selling products at a low price, your gross profit will decrease.