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.

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.
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.

Solved Examples

Question 1: Find the gross profit from the following:

 Sales       2332500
 Opening stock    65816
 Purchases      90850
 Closing Stock    15300

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?
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$\frac{5}{11}$ %.