To calculate gross profit, subtract the variable costs or costs of goods sold from the revenue generated by a business during a given period. If revenue equals $150,000 and COGS equals $75,000, for instance, the gross profit is $75,000.
Gross profit is the first of three levels of profit depicted on a company's income statement. Revenue is the total cash and account sales generated from products and services for the period. COGS include all expenses directly connected to the sale of goods. Common examples of COGS include materials costs, manufacturing or acquisition costs, direct labor, packaging, and shipping. COGS are sometimes itemized on a multi-step income statement before the subtotal for all COGS is shown.
A healthy gross profit is important to cover fixed expenses and generate a profit for a period. In addition to calculating the dollar total for gross profit, company leaders compute the gross profit margin to analyze gross profit efficiency. Gross profit margin is gross profit divided by the revenue. With a gross profit of $75,000 on $150,000 in revenue, the gross profit margin is 50 percent. This margin means it takes $2 in revenue to generate every $1 in gross profit. Company leaders compare period gross profit margins to trends and to industry norms to gauge effectiveness in converting revenue into gross profit.