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Gross Profit

Updated: Apr 26

Gross profit is the profit a company makes after deducting the costs associated with producing and selling its products or the costs associated with its services. Gross profit may also be referred to as sales profit or gross income.


Gross profit appears on a company's income statement and is calculated by subtracting the cost of goods sold (COGS) from revenue or sales.


Gross profit assesses a company's efficiency in using labor and supplies to produce goods or services. Gross profit does not include fixed costs or costs that must be paid regardless of the level of output. Fixed costs include items like rent, advertising, and insurance. The metric looks at variable costs that fluctuate with the level of output, such as:

  • Materials

  • Direct labor, assuming it is hourly or otherwise dependent on output levels

  • Commissions for sales staff

  • Credit card fees on customer purchases

  • Equipment, perhaps including usage-based depreciation

  • Utilities for the production site

  • Shipping

Formula for Gross Profit

​Gross profit = Net sales − CoGS

where:

  • Net sales = Equivalent to revenue, or the total amount of money generated from sales for the period. It can also be called net sales because it can include discounts and deductions from returned merchandise. Revenue is typically called the top line because it sits on top of the income statement. Costs are subtracted from revenue to calculate net income or the bottom line.

  • CoGS = Cost of goods sold. The direct costs associated with producing goods. Includes both direct labor costs, and any costs of materials used in producing or manufacturing a company’s products.

Source: Investopedia, Gross Profit: What It Is & How to Calculate It, accessed 25 December 2023, <https://www.investopedia.com/terms/g/grossprofit.asp>

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