Gross profit is a company’s total revenue minus the cost of goods sold (COGS), and is a measure of a company’s profitability before taking into account fixed and variable expenses. Gross profit is calculated by subtracting the cost of goods sold from total revenue:
Gross profit = Total revenue – COGS
The cost of goods sold (COGS) includes the direct costs associated with producing the goods or services that a company sells. These costs may include materials, labor, and manufacturing overhead.
Gross profit is an important metric for businesses, as it helps to determine the efficiency of a company’s operations and the pricing of its products or services. A high gross profit margin (gross profit as a percentage of total revenue) indicates that a company is able to effectively control its production costs and charge high prices for its products or services. A low gross profit margin may indicate that a company is struggling to control its costs or that it is pricing its products or services too low.
Gross profit is typically used to cover a company’s fixed and variable expenses, and any remaining gross profit is known as net profit or net income. It is important to note that gross profit does not take into account all of a company’s expenses, such as marketing, research and development, and administrative expenses, which are deducted from gross profit to determine net profit.