The Gross Profit is the difference between the selling price and the cost price (income - expense). To obtain gross profit percentage divide gross profit by sales and gross profit margin is expressed in percentages.

It is useful to evaluate financial performance of a company as it helps to identify the profits earned by the company. A company with little gross profit will have limited resources.

## Gross Profit Percentage Formula

In order to calculate gross profit we require cost of good sold and the net sales of a company. Revenue of the company is also known as net sales.
The formula to calculate gross profit is:

Gross Profit Percentage = $\frac{Gross\ Profit }{ Selling Price}$
where Gross Profit = Net Sales Price - Cost of goods.
The following formula help us:
• Comparing Gross Profit Percentage ratio to an Industry average: Determines the Operation Performance as it shows production efficiency in relation to prices and unit volumes at which products (services) are sold.
• Comparing the Gross Profit Percentage between different divisions within an entity: One can identify which divisions require further investigation and gets a thorough knowledge of the company's business.
• Comparing the Gross Profit Percentage over time: We can easily compare the cost of sales of previous years and see whether cost of sales was overstated or understated. A change in the cost of sales may be due to production methods, or some other legitimate reason.

## How to calculate Gross Profit Percentage

1. To calculate gross profit, subtract sales revenue from total sales cost.
For example, if a person sells his product for 10 dollars and it costs him 4 dollars then his gross profit is 6 dollars.

2. Dividing gross profit by gross sales revenue gives gross profit percentage.

3. Gross profit percentage is profit before operating expenses, such as paying salaries and turning on the lights.

## Gross Profit Percentage Examples

### Solved Examples

Question 1: Find the gross profit from the following:

 Particulars 1 Sales 2332500 Opening stock 65816 Purchases 90850 Closing Stock 15300

Solution:

Cost of goods sold = Opening stock + Purchases - Closing stock

= 65816 + 90850 - 15300

= 141366

Gross Profit = 2332500 - 141366

= 2191134

Gross profit ratio = $\frac{Gross\ Profit}{Selling\ Price}$ $\times 100$

= $\frac{2191134}{2332500}$ $\times 100$

= 93.94%

Question 2: Ajith buys a car for $\$$4700 and spends \$$800 for its repairs. If he plans to sell his car for$\$$5800. What would be his gross profit percentage? Solution: Cost Price (C.P) = \$$(4700 + 800) = $\$$5500 Selling Price (S.P) = \$$5800 Profit = (S.P) - (C.P) =$\$$(5800 - 5500) = \$$300

Gain Profit Percentage = $\frac{300}{5500}$ $\times 100$ = $\frac{60}{11}$ = 5$\frac{5}{11}$ %.