Co-authored byMichael R. Lewis
Last Updated: November 18, 2023Approved
Gross profit is a way to compare the cost of the goods your company sells and the income derived from those goods. All you need for the gross profit formula is your total revenue, and the cost of goods sold (COGS). You can use your gross profit margin to quickly and meaningfully compare your company to your competitors, the industry as a whole, or even your own past performance. Our how-to guide breaks it down for you, including examples.
Part 1 of 2:
Calculating Gross Profit Margin
1
Look up Net Sales and Cost of Goods Sold. The company's income statement lists both values.
2
Gross Profit Margin = (Net Sales - Cost of Goods Sold) ÷ Net Sales.
3
Example. A company makes $4,000 selling goods that cost $3,000 to produce. Its gross profit margin is , or 25%.
Part 2 of 2:
Understanding the Terms
1
Understand Gross Profit Margin. The Gross Profit Margin (GPM) is the percentage of revenue a company has left over after paying direct costs of producing goods.[1] All other expenditures (including shareholder dividends) must come out of this percentage. This makes the GPM a good indicator of profitability.
2
Define Net Sales. A company's net sales equal its total sales minus returns, allowances for damaged merchandise, and discounts.[2] This is a more accurate measure of incoming money than total sales alone.
3
Measure Costs of Goods Sold. Abbreviated COGS, this figure includes the cost of materials, labor, and other expenses directly related to the production of goods or services.[3] It does not include costs of distribution, labor that does not go into goods production, or other indirect costs.
4
Avoid confusing Gross Profit with GPM. The Gross Profit equals the Net Sales minus the Cost of Goods Sold. This is expressed in dollars or other units of currency. The formula above converts Gross Profit to GPM, a percentage, for easy comparison with other companies.
5
Understand why these figures are important. Investors look at Gross Profit Margin to see how efficiently a company can use its resources. If one company has a GPM of 10% and a second company has a GPM of 20%, the second company is making twice as much money per dollar spent on goods. Assuming other costs are roughly equal between the two companies, the second company is probably the better investment opportunity.
- It's best to compare companies in the same sector. Some goods and services have a lower average profit margin than others.
Question
How do I calculate the profit, expressed as a percentage, that the vendor makes when selling a 180 airtime voucher?
Subtract the cost of the voucher from the price received from its sale. the difference is gross profit. To calculate the Gross Profit Margin percentage, divide the price received for the sale by the gross profit and convert the decimals into a percentage. For example, 0.01 equals 1%, 0.1 equals 10 percent, and 1.0 equals 100 percent.
Question
How do I calculate the gross as a percentage if I have the GP in dollars and the net sales in dollars?
Business Advisor
Expert Answer
Net Sales is Gross Sales less returns, discounts, and allowances for damaged or missing goods. Calculate Gross Sales by adding back those amounts if known to Net Sales, then divide your Gross Profit by Gross Sales. This will provide the answers in decimals that can be converted into a percentage.
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Co-authored by:
Business Advisor
This article was co-authored by Michael R. Lewis. Michael R. Lewis is a retired corporate executive, entrepreneur, and investment advisor in Texas. He has over 40 years of experience in business and finance, including as a Vice President for Blue Cross Blue Shield of Texas. He has a BBA in Industrial Management from the University of Texas at Austin. This article has been viewed 1,433,106 times.
Co-authors: 19
Updated: November 18, 2023
Views:1,433,106
Article Rating:56% - 9 votes
Categories: Featured Articles | Accounting
Article SummaryX
To calculate gross profit margin, start by subtracting the cost of goods sold from the net sales. Then, divide the difference by the net sales to find the gross profit margin. If you're not sure what the net sales and cost of goods sold are, you can look them up on the company's income statement. For more tips from our Financial co-author, like how to interpret gross profit margin, scroll down!
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FAQs
Different Formula for Calculating Profit
- Profit Percentage = Profit/ Cost Price * 100.
- Net Profit = Total Revenue – Total Cost – Indirect Costs.
- Gross Profit Margin = (Gross Profit/ Total Revenue)* 100.
- Net Profit Margin = (Net Profit/ Total Revenue)*100.
- Average Profit = Total profits/ Number of years of profit.
The gross profit margin formula, Gross Profit Margin = (Revenue – Cost of Goods Sold) / Revenue x 100, shows the percentage ratio of revenue you keep for each sale after all costs are deducted. It is used to indicate how successful a company is in generating revenue, whilst keeping the expenses low.
How do you calculate gross profit step by step? ›
Gross profit is calculated by subtracting the cost of goods sold (COGS) from total revenue. Generally, only variable costs are considered in COGS when calculating gross profit.
How do you calculate gross profit grade 8? ›
The gross profit formula is the total revenue minus cost of things sold. It is the company's profit before all interest and tax payments.
Is 8 profit margin good? ›
An NYU report on U.S. margins revealed the average net profit margin is 7.71% across different industries. But that doesn't mean your ideal profit margin will align with this number. As a rule of thumb, 5% is a low margin, 10% is a healthy margin, and 20% is a high margin.
How to calculate margin with an example? ›
Here's how you can calculate a 20 percent profit margin:
- Change 20 percent to its decimal form of 0.20.
- Subtract 0.2 from 1, equalling 0.8.
- Divide the original price of your product by 0.8.
- This number is what your sale price should be if you want a 20 percent profit margin.
To determine the gross profit margin, we need to divide the gross profit by the total revenue for the year and then multiply by 100. To determine the net profit margin, we need to divide the net income (or net profit) by the total revenue for the year and then multiply by 100.
What is an example of a gross profit? ›
Gross profit is the revenue left over after you deduct the costs of making a product or providing a service. You can find the gross profit by subtracting the cost of goods sold (COGS) from the revenue. For example, if a company had $10,000 in revenue and $4,000 in COGS, the gross profit would be $6,000.
How to calculate the profit? ›
When the selling price and the cost price of a product is given, the profit can be calculated using the formula, Profit = Selling Price - Cost Price. After this, the profit percentage formula that is used is, Profit percentage = (Profit/Cost Price) × 100.
How do you calculate gross profit on a calculator? ›
How do I calculate gross profit on a calculator?
- Estimate your cost of goods sold COGS.
- Calculate the revenue you get from the goods sold.
- Subtract the cost of goods from revenue to get gross profit.
- Now divide the answer by revenue.
- Multiply it by 100 to get gross profit in percentage.
Gross Profit is the total revenue amount that a company earns before deducting the expenses connected with that revenue. To calculate Gross Profit, you should know the total amount of Net Sales and the total amount of Cost of Goods Sold. The formula of Gross Profit is Gross Profit = Net Sales – Cost of Goods Sold.
What is 8s gross profit? ›
What is gross profit? Gross profit is the profit a business makes after subtracting all the costs that are related to manufacturing and selling its products or services. You can calculate gross profit by deducting the cost of goods sold (COGS) from your total sales.
How to find gross profit ratio with example? ›
Gross Profit Ratio Examples
Now that we have the two elements of the gross profit ratio formula, we can calculate it by dividing the gross profit by the total sales figure. 57.000/100.000=0.57We can then express it as a percentage by multiplying it by 100.
How do you calculate profit margin for a small business? ›
To calculate the Gross Profit Margin for your startup or small business, take the revenue and minus the direct costs of producing your product. Divide this by the revenue. The resulting number is multiplied by 100 and the answer is expressed as a percentage.
How do you calculate the margin? ›
Let's put the margin meaning into a margin calculation formula:
- Margin = [(Revenue – COGS) / Revenue] X 100.
- Margin = (Gross Profit / Revenue) X 100.
- Margin = [($200 – $150) / $200] X 100.
- Margin = 25%
- Markup = [(Revenue – COGS) / COGS] X 100.
- Markup = (Gross Profit / COGS) X 100.
- Markup = [($200 – $150) / $150] X 100.
The standard profitability indicator suggests that profit percentage comprises two components – Sales and expenses, and the Profit Percentage equation. Here, the Profit Percentage equation = (Net Sales – Expenses) / Net Sales or 1 – (Expenses / Net Sales).
What is the formula for profit margin ratio with example? ›
Net Profit Margin = Net Profit ⁄ Total Revenue x 100
The result of the profit margin calculation is a percentage – for example, a 10% profit margin means for each $1 of revenue the company earns $0.10 in net profit. Revenue represents the total sales of the company in a period.
