Gross Profit
Gross profit is a financial metric that represents the amount of money a company makes from its goods or services before subtracting overhead costs, like administrative expenses, taxes, and interest. In other words, it’s the profit a company makes after subtracting the costs directly related to producing the goods or services sold, also known as cost of goods sold (COGS).
The formula for calculating gross profit is:
Gross Profit = Total Revenue – Cost of Goods Sold (COGS)
It’s important to note that gross profit considers only the cost of production and not other expenses, such as rent, utilities, salaries, and marketing costs, which are considered when calculating net profit.
Gross profit is often expressed as a percentage of sales (gross profit margin), which shows what proportion of revenue is left over after accounting for the costs of production. It’s a key metric used to evaluate a company’s efficiency and financial health, as it provides insights into how well a company manages its production costs relative to its revenue.
Example of Gross Profit
Imagine a company, “Stellar Shoes,” that manufactures and sells shoes. In the last fiscal year, Stellar Shoes reported the following figures:
- Total Revenue (from shoe sales): $1,000,000
- Cost of Goods Sold (COGS; the cost of producing the shoes): $400,000
We can calculate the Gross Profit as follows:
Gross Profit = Total Revenue – Cost of Goods Sold (COGS)
Gross Profit = $1,000,000 – $400,000 = $600,000
So, Stellar Shoes’ Gross Profit for the last fiscal year is $600,000. This means that after paying the direct costs associated with producing its shoes ($400,000), Stellar Shoes has $600,000 left over to cover its indirect costs (like rent, utilities, and salaries) and to contribute to profit.
Furthermore, we can calculate the Gross Profit Margin as follows:
Gross Profit Margin = (Gross Profit / Total Revenue) x 100%
Gross Profit Margin = ($600,000 / $1,000,000) x 100% = 60%
So, Stellar Shoes’ Gross Profit Margin for the last fiscal year is 60%. This means that for every dollar of revenue Stellar Shoes generates, it retains $0.60 after accounting for the cost of producing its shoes. This $0.60 can then be used to cover other costs and to generate profit.
