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What is Gross Profit?
Gross Profit represents the amount a company earns after subtracting the direct costs of producing the goods or services it sells. It reflects how efficiently a business turns revenue into profit before operating expenses are considered.
Definition
Gross Profit is the difference between total revenue and the cost of goods sold (COGS).
Key Takeaways
- Gross Profit measures core profitability from production and sales.
- It excludes operating costs, taxes, and interest.
- A key indicator of pricing power and cost efficiency.
Understanding Gross Profit
Gross Profit helps businesses evaluate how effectively they produce and deliver their products. It focuses only on direct costs, such as raw materials and labor directly tied to production.
A rising gross profit indicates improved efficiency or successful pricing strategies. A decline may signal rising production costs, competitive pressure, or inefficiencies.
Gross Profit is used for budgeting, forecasting, and analyzing operational performance. It also forms the basis for calculating gross margin.
Formula (If Applicable)
Gross Profit = Revenue – Cost of Goods Sold (COGS)
Where:
- Revenue: Income from sales.
- COGS: Direct costs of goods sold or services delivered.
Real-World Example
If a company generates P500,000 in revenue and incurs P300,000 in COGS, Gross Profit is:
P200,000
This figure shows how much money remains before covering operating expenses.
Importance in Business or Economics
- Helps assess production efficiency.
- Guides pricing and cost control strategies.
- Essential for profitability analysis and financial planning.
- Used by investors and analysts to evaluate business performance.
Types or Variations
- Adjusted Gross Profit: Excludes irregular or one-time costs.
- Gross Profit Ratio: Gross Profit expressed as a percentage of revenue.
Related Terms
- Gross Margin
- Net Profit
- Cost of Goods Sold (COGS)
Sources and Further Reading
Quick Reference
- Purpose: Measure profit after production costs.
- Key Formula: Revenue – COGS.
- Indicator: Core business profitability.
Frequently Asked Questions (FAQs)
Is gross profit the same as gross margin?
No. Gross profit is a value; gross margin is a percentage.
Why is gross profit important?
It shows how efficiently a company produces and sells goods.
Can gross profit be negative?
Yes, if COGS exceed revenue.
