How to calculate Gross Profit?

Business organizations mainly work for the profit they earn. Profit is known as the excess of the revenue over the expenditure. A business organization that doesn’t earn a profit or incur losses can’t survive in the market. Mainly it is a perimeter by which the sustainability and the success are measured of an organization. That’s why profit is most important for an organization.

Profits can be classified as:

• ​Net profit: It is the profit of an organization after the deduction of the taxes and other expenses.
• ​Gross profit: It is known as when the amount of goods sold is deducted from the total revenue.

​Here, we will study the gross profit and its formula in detail.

Gross Profit

Gross profit is the amount of the total revenue earned by an organization minus the cost of the goods sold by the organization. Gross profit is the amount of profit before all interest and tax payments. Gross margin is the other name given to the gross profit. It is the profit earned by the organization from the trading activities of the firm. In other words, this profit doesn’t include indirect income or expenses.

The gross profit mainly represents to the management as well as to the investors of the firm how efficiently the business manufactures and sells the products to the market. As we can say that the gross profit helps us to show the profitability of the products.

It is a vital source as it gives understanding to the investors that how financially and healthy a firm is. It is said that a company showing good net profit may be actually dying. A deep study tells that a company is not earning the profit from its core activities like buying and selling of the products rather than this they may have other sources of income.

The indirect revenue like income from interest, rent, commission, etc is not included in the gross profit. Likewise, no indirect expenses such as electricity charges, insurance, travel expenses, etc are not deducted from the gross profit.

Concepts of gross profit help the management in creating the budgets and future forecasting. Even the investors get help in comparison of profits or margins of two different companies disregarding their size and the sales value. There is a formula for the calculation of gross profit the formula is as follows:

Formula of Gross Profit

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

Gross profit percentage= Gross profit / Total sales × 100

Similar Problems

Question 1: The purchase cost of a car is ₹400000. The owner sells it for ₹560000. Find the amount of gross profit?

Solution:

Gross profit = Revenue – Cost of goods sold

                   = 560000 – 400000

                   = 160000

Question 2: The cost of raw materials is ₹13000, the cost of labor is ₹3000, the sales of the firm are ₹20000. Find Gross profit

Solution:

Gross profit = Total sales – Cost of goods sold

                   = 20000 – 16000

                   = ₹4000

Working note.

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

                             = 13000 + 3000

                             = ₹ 16000

Question 3: Gross profit is ₹60000 and total revenue is ₹80000. Find the percentage of gross profit?

Solution:

Gross profit percentage= Gross profit / Total revenue× 100

Gross profit = 60000

Revenue = 80000

Gross profit percentage = 60000/80000 ×100 

                                     = 75%

Question 4: If the cost of a fan is 5.30 dollars and sold at 7.90 dollars. Find the gross profit?

Solution:

Given Revenue = 5.30

Selling price = 7.90

Gross Profit = Revenue – Cost of Goods

Gross Profit = 7.90 – 5.30

Gross Profit = 2.6

Question 5: The cost of raw materials for the production of a product is ₹56000, and the wages paid to the labor is ₹7000, the sales of the firm are ₹1,20,000. Find Gross profit and its percentage.

Solution:

Gross profit = Total sales – Cost of goods sold

                   = 120000 – 63000

                   = ₹57000

Working note.

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

                             = 56000 + 7000

                             = ₹63000

Gross profit= ₹57000

Gross profit percentage=Gross profit / Total revenue × 100

Gross profit = 57000

Revenue = 120000

Gross profit percentage = 57000 / 120000 × 100

                                     = 47.5%