Gross profit versus gross margin, or gross profit margin, is the difference between how income after costs is expressed; gross profit reflects the flat number and margin refers to this figure as a percentage.
Gross profit is computed as the total amount of revenue in sales minus the cost of the goods sold.
Costs may include labour, materials, packaging, freight, utilities and expenses occurred to store the product, warehousing and depreciation on equipment. These are considered variable expenses because they may change with the type of product.
Fixed Expenses vs Variable Expenses
Fixed expenses are those which remain unchanged and are more in the nature of company operating expenses, such as administrative salaries, office rental and utilities. Variable expenses are counted as part of the costs of the goods sold in the gross profit equation; fixed expenses are not.
Gross Profit Margin
Gross profit margin is the percentage of sales remaining after the direct costs, and is computed as the gross profit divided by the sales. The higher the percentage, the more money is left for the other, or fixed, expenses. This equates to the general health or profitability of the company.
Investors and Gross Profit Margin
Financial investors are also interested in the gross profit margin of a company to determine whether it is able to meet its short-term debt and liabilities, and therefore likely to be a good investment.
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