If we talk about a company, gross profit is an income or we can say profit that a company makes after deducting all the costs associated with the production & selling of goods and services. On the other hand, for the individuals or households, it is an amount which is a summation of wages/salaries, profits or any interest payments, rents, and other kinds of earnings. It is an amount that we get before any payment of taxes & other deductions. It is exactly the opposite of net profit or net income where the amount we get is always after the payment of taxes & other deductions. In this article, we will cover all the formulas related to this concept such as gross margin formula or gross profit margin formula, gross profit ratio or gross margin percentage, etc.
Gross Profit Formula
The formula or gross profit equation through which we can calculate the gross profit or gross revenue is given below:
Gross Profit/Gross revenue formula = Revenue – Cost of Goods Sold
Here, revenue or profit is the amount that we get at the end after selling the products produced by the company at a specific time. The amount before any payment of taxes & other deductions is taken here. On the other hand, if we talk about COGS or Cost of Goods Sold, that includes all the direct costs which are associated with the production of the products & it does not include the costs of administration or marketing-related costs. The costs it includes are depreciation, labour cost, factory overheads, cost of materials or storage.
Gross Margin Formula / Gross Profit Margin Formula
When we express gross profit in the form of a percentage, it is known as Gross Profit Margin or gross margin. The gross profit margin formula is given below:
Gross margin formula = (Revenue – Cost of Goods Sold)/Revenue x 100
Here, we get to know that gross profit can be used to find out other metrics such as gross profit margin. Sometimes the terms gross profit margin, as well as gross profit margin, are used interchangeably but they are not the same because the former is calculated as well as expressed in the form of currency whereas the latter is expressed in the form of a percentage.
Gross Profit Ratio Formula
This can be calculated with the help of the following formula:
[text{Gross Profit Ratio = }frac{text{Gross Profit}}{text{Net Sales}}]
When we express the gross profit ratio in the form of percentage form, it is simply called gross profit margin or gross profit percentage. The gross profit percentage formula is mentioned below:
[text{Gross Profit Ratio = }frac{text{Gross Profit}}{text{Net Sales}}times100]
In both the above-mentioned formulas, the two required components are gross profit as well as net sales. Gross profit can be calculated by subtracting the cost of goods sold from revenue or net sales whereas net sales can be calculated by subtracting any returns inwards as well as discounts allowed from the gross sales. This information can be collected from the income statement of the company.
Examples
Let’s understand the GP formulas more clearly with the help of the following solved examples whose answers can be checked through the profit percentage calculator:
Problem 1. Calculate the Gross Profit using the gross profit rate formula, if the Cost of goods sold is Rs. 12,000 and revenue is Rs. 76000.
Solution: Using the formula:
Gross profit formula = Revenue – Cost of Goods Sold
= 76,000 – 12,000
= Rs. 64,000/-
Problem 2. Calculate the gross profit of the company if gross sales are Rs. 20,00,000, sales return is Rs. 2,50,000 and COGS is Rs. 1,50,000.
Solution: Gross profit can be calculated in the following way:
|
Gross Sales |
20,00,000 |
|
Less: Sales Returns |
2,50,000 |
|
Net Sales |
17,50,000 |
|
Less: Cost of Goods Sold |
3,50,000 |
|
Gross Profit |
14,00,000 |
Problem 3. The following data relates to a small trading company. Compute the gross profit ratio and gross profit percentage of the company.
Gross sales: ＄1,00,000
Sales returns: ＄10,000
Cost of goods sold: ＄18,000
Solution:
Net sales = Gross sales – Sales returns
= ＄1,00,000 – ＄10,000
= ＄90,000
Gross profit = Net sales – Cost of goods sold
= ＄90,000 – ＄18,000
= ＄72,000
Gross profit ratio / Gross margin ratio formula
=[ frac{text{Gross Profit}}{text{Net Sales}}]
= [ frac{90,000}{72,000}]
= 0.8
Gross Profit Percentage or Gross Margin Percentage Formula = [frac{text{Gross Profit}}{text{Net Sales}}] * 100
= 0.8 * 100
= 8%
Conclusion
To conclude in the end, we can say that after reducing the costs related to the production of the goods and services from the total revenue that we generate after selling the goods and services, we can get gross profit but this is not the actual profit that we enjoy because taxes and other related deductions have not been deducted from this. Thus, when we deduct the taxes from this gross profit, then we get actual income that we can enjoy. Besides these, we also learned how to calculate other metrics such as gross margin ratio and gross revenue percentage, etc.