Gross Profit Definition – Meaning, Example and Importance

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Gross Profit Definition, Meaning and Examples

Gross Profit Definition: The sum remaining when COGS is subtracted from the revenue.

In simple words, the difference between the cost of goods sold and revenue. It is obtained after making deductions in the cost incur in producing and selling the product. Gross margin appear in the Income statement. It is also known from various names such as “gross margin”, “gross income” and “sales profit”

Gross Profit = Revenue – Cost of Goods Sold

The main purpose of the gross profit is to assess the organization’s efficiency. It includes only variables costs which fluctuates with the level of output. For example – materials, labor, usage based depreciation, etc.

Gross Profit Example

To understand, gross profit definition more clearly, let’s discuss an example. XYZ company Ltd has the revenue of Rs. 1,00,000, direct expenses of Rs. 30,000, labor expenses of Rs. 20,000 and factory overhead is 15,000.

Gross Profit = 1,00,000 – (30,000+20,000+15,000)

=  35,000

Related Financial Terms of Gross Profit

Importance of Gross Profit/ Gross Margin

Gross profit is vital for any company in order to know the firm’s core profitability before the overhead expenses. At the same time, it throws light over the financial success of a product or a service.

It also allows the companies to compare each other within the similar industry. This comparison helps in determining the relative profitability of each other.

Firms with higher gross profit margin have an edge over their rivals. As these firms can charge higher price for a product or service. This is because of  higher revenues or lower cost of goods sold.

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