how to find gross profit

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 Gross 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 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 The profit and loss statement is a financial report that summarizes the company's revenues and expenses over a period of time to determine profit or loss for that period. read more , and the same can also be calculated by subtracting the COGS that is the cost of goods sold The 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 from sales or revenue.

The Equation for Gross Profit is:

Gross Profit = Net Revenue – Cost of Goods Sold

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Source: Gross Profit Formula (wallstreetmojo.com)

Steps to Calculate Gross Profit

To calculate Gross profit, one needs to follow the below steps.

Step 1: Find out the Net sales Net 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. read more or 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. read more that takes a total of gross sales and reduce the same by sales return.
Step 2: Secondly, the cost of sales The costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales. read more 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.

Examples

You can download this Gross Profit Formula Excel Template here – Gross Profit Formula Excel Template

Example #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.

Solution:

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

Note: The cost of sales is inclusive of raw material and labor costs.

Example #2

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.
Sales	35000000.00	35000000.00
Opening Stock	11200000.00	14700000.00
Closing Stock	7000000.00	11665500.00
Purchases and Other Expenses	29750000.00	31150000.00

You are required to calculate the Gross margin and advise who could be the likely winner of the bid at this auction.

Solution:

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 Internal audit refers to the inspection conducted to assess and enhance the company's risk management efficacy, evaluate the different internal controls, and ensure that the company adheres to all the regulations. It helps the management and board of directors to identify and rectify the loopholes before the external audit. read more 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.

Solution:

Calculation of gross profit can be done as follows –
Gross Profit Formula Example 3.1

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

Net Revenue
Cost of Goods Sold
Gross Profit Formula

Gross Profit Formula =	Net Revenue – Cost of Goods Sold
0 – 0 =	0

Relevance and Uses

It can also be called gross income The difference between revenue and cost of goods sold is gross income, which is a profit margin made by a corporation from its operating activities. It is the amount of money an entity makes before paying non-operating expenses like interest, rent, and electricity. read more , 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.