Updated May 30, 2023
Gross Profit Formula (Table of Contents)
- Gross Profit Formula
- Examples of Gross Profit Formula (With Excel Template)
- Gross Profit Formula Calculator
Gross Profit Formula
The term “gross profit” refers to the profit of a company that is derived after subtracting all the costs that can be allocated to the production and sales (also known as the cost of goods sold or cost of sales) or the costs that can be assigned to the service provided. Some companies report a gross profit as a line item in the income statement. The formula for gross profit can be derived by subtracting the cost of goods sold (COGS) from the company’s net sales.
Mathematically, it is represented as:
Examples of Gross Profit Formula (With Excel Template)
Let’s take an example to understand the calculation of the Gross Profit in a better manner.
Example #1
Let us take the example of a mechanic shop that has reported net sales of $150,000 for the year ended on March 31, 2019. As per the income statement, the COGS stood at $105,000 during the period. Calculate the gross profit of the machine shop for the year.
Solution:
To calculate Gross Profit, you can use the formula provided below:
Gross Profit = Net Sales – COGS
- Gross Profit = $150,000 – $105,000
- Gross Profit = $45,000
Therefore, the machine shop booked a gross profit of $45,000 during the year ended on March 31, 2019.
Example #2
ABC Limited is in the business of manufacturing rigid and flexible packaging products in the US region. Recently the company published its financial performance, which showed that ABC Ltd clocked net sales of $500,000 during the year ended on December 31, 2018. Therefore, calculate the gross profit for ABC Ltd based on the given information.
COGS is calculated using the formula given below:
COGS = Raw Materials Expense + Labour Wage + Factory Lease Rental
- COGS = $185,000 + $135,000 + $50,000
- COGS = $370,000
Gross Profit is calculated using the formula given below:
Gross Profit = Net Sales – COGS
- Gross Profit = $500,000 – $370,000
- Gross Profit = $130,000
Therefore, ABC Ltd secured a gross profit of $130,000 during the year ended on December 31, 2018.
Example #3
Let us take the example of Airbus SE to calculate the gross profit for the calendar years 2016, 2017, and 2018. The following information is available per the annual reports for the year ending on December 31, 2018.
It is calculated using the formula given below:
Gross Profit = Net Sales – COGS
For 2016
- Gross Profit = €66,581 Mn – €61,317 Mn
- Gross Profit = €5,264 Mn
For 2017
- Gross Profit = €59,022 Mn – €52,149 Mn
- Gross Profit = €6,873 Mn
For 2018
- Gross Profit = €63,707 Mn – €54,920 Mn
- Gross Profit = €8,787 Mn
Therefore, we can observe that despite some volatility in net sales, Airbus SE’s gross profit has consistently improved from €5,264 Mn in 2016 to €8,787 Mn in 2018.
Explanation
You can derive the formula for gross profit by following the steps outlined below:
Step 1: First, determine the company’s net sales, which are readily available as a line item in the income statement.
Step 2: Next, you can determine the COGS from the income statement by adding all the costs of production that directly allocate to manufacturing. Such direct costs include raw material costs, factory rent, labor wages, etc.
Step 3: Finally, the formula for gross profit can be derived by subtracting the COGS (step 2) from the net sales (step 1) of the company, as shown below.
Gross profit = Net sales – COGS
Relevance and Uses
We know that gross profit is the difference between net sales and the direct cost of production and sales. As such, we must understand that we can impact a company’s bottom line by increasing gross profit. One of the ways to increase the gross profit is to either increase efficiency, which will apportion the direct cost of production to increased volume, which means that we can make more money without even increasing the sales. This can prove to be a critical strategy in a highly competitive market where the competitors are also manufacturing and selling the same product. Higher gross profit can be a tremendous competitive advantage.
Gross Profit Formula Calculator
You can use the following Gross Profit Calculator
| Net Sales | |
| COGS | |
| Gross Profit Formula | |
| Gross Profit Formula = | Net Sales – COGS |
| = | 0 – 0 |
| = | 0 |
Recommended Articles
This has been a guide to the Gross Profit formula. Here we discuss how to calculate Gross Profit along with practical examples. We also provide a Gross Profit calculator with a downloadable Excel template. You may also look at the following articles to learn more –
