Gross profit is Sales Revenue-Cost of Goods Sold or COGS. Total revenue a business earned after subtracting the producing cost of the goods. Basically, the formula reveals the net profit a business makes from its core products or services, excluding expenses.
A higher gross profit value indicates that a business is earning more from its goods and services after subtracting overall product expenses. Whereas a lower gross profit value does not necessarily mean that a business is at a loss. It just means less money is left after COGS.
How It Works:
- Total revenue from sales is calculated.
- Cost of goods sold is determined.
- Gross profit is calculated by subtracting cost from revenue.
- The result indicates basic profitability before expenses.
Benefits:
- Helps measure operational efficiency
- Indicates pricing effectiveness
- Supports financial analysis
- Aids in decision making
Example:
A company sold 10 units of goods for Rs 1,50,000, that are produced for Rs 50,000 only. It earned a gross profit of Rs 1,00,00.