How Do You Calculate Total Profit?
Total profit, also called gross profit, is calculated by taking the total received from sales and subtracting the cost of the goods sold. It does not include expenditures, such as insurance and taxes. Gross profit is used to calculate the gross profit margin.
- Calculate the total revenue
This is all the money the business made by selling products and services. Take all the money received by customers, and add it up. If a company sells Item A for $10, Item B for $5 and Item C for $15, the total revenue is $35.
- Add up the cost of goods
The cost includes items that were directly involved in the production of the item, such as materials, shipping costs and merchant fees. It does not include overhead items, such as office supplies, administrative costs, legal fees or rent payments. If Item A costs the company $5 to make, sell and ship, Item B costs $2 and Item C costs $10, then the cost of the total goods is $17.
- Subtract the cost of goods from the total revenue
The difference is the company's total profit. In the example, $35 minus $17 is $18, so $18 is the total profit. This number is then used to calculate the gross profit margin, a measurement of operating efficiency, by taking the gross profit and dividing it by the total revenue. For example, it is $18 divided by $35 for a profit margin of 51 percent.