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What Is the Formula for Gross Profit?

Updated February 23, 2018

Gross profit is used to determine how efficient a company is able to manage its resources in the creation of its products. Gross profit is also known as gross margin. Gross profit can be determined on an item-by-item basis or for a company as a whole.

Formula

Gross profit is equal to the revenues generated minus the cost of the goods that were sold. For example, if a company sold £6 million worth of furniture and it cost £5 million to produce the furniture, the gross profit would be £1.3 million.

Revenues

Revenues represent all income received for goods sold and services performed by the company. These include the physical items, as well as intangible services such as warranties on the products.

Cost of Goods Sold

The cost of goods sold is calculated by adding all the costs of production. This includes the cost of the natural resources, factories and human labour to produce the goods.

Why COGs is Significant

The cost of goods sold is helpful to companies to help determine where they are spending most of their money in terms of production.

Limitations

Gross profit as a measure of efficiency is limited to comparisons within a given industry. Different industries have different input requirements to calculate the costs of goods sold. For example, gross profit could be used to compare two computer companies, but it would be much less effective if you tried to use it compare the efficiency of a computer company with a logging company.

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About the Author

Mark Kennan is a writer based in the Kansas City area, specializing in personal finance and business topics. He has been writing since 2009 and has been published by "Quicken," "TurboTax," and "The Motley Fool."