Gross Profit Formula

Gross Profit Formula (Table of Contents)

Gross Profit Formula
Examples of Gross Profit Formula (With Excel Template)
Gross Profit Formula Calculator

The term “gross profit” refers to that profit of a company that is derived after subtracting all the costs that can be allocated to the production and sales (also known as cost of goods sold or cost of sales), or the costs that can be assigned to the service provided. Some of the 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 net sales of the company. Mathematically, it is represented as,

Gross Profit = Net Sales – COGS

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.

You can download this Gross Profit Formula Excel Template here – Gross Profit Formula Excel Template

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:

Gross Profit is calculated using the formula given 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 has published its financial performance which that ABC Ltd has clocked net sales of $500,000 during the year ended on December 31, 2018. 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

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COGS = $185,000 + $135,000 + $50,000
COGS = $370,000

[Interest paid, depreciation expense and taxes paid are not considered in the computation of COGS because these are not a direct cost of production]

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 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 year 2016, 2017 and 2018. As per the annual reports for the year ending on December 31, 2018, the following information is available:

Gross Profit 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, it can be seen that despite some volatility witnessed in the net sales, the gross profit of Airbus SE has continued to improve from €5,264 Mn in 2016 to €8,787 Mn in 2018.

Explanation

The formula for gross profit can be derived by using the following steps:

Step 1: Firstly, determine the net sales of the company and it is easily available as a line item in the income statement.

Step 2: Next, determine the COGS from the income statement by adding all the costs of production that can be allocated directly to the manufacturing. Examples of such direct costs are raw material cost, factory rent, labour wage, 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 of Gross Profit Formula

Now, we know that gross profit is basically the difference between net sales and the direct cost of production and sales. As such, we need to understand that we can impact the bottom line of a company by increasing gross profit. One of the ways to increase the gross profit is to either increase efficiency that 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 great competitive advantage.