How Is Gross Profit Percentage Calculated?
To calculate the gross profit percentage, also known as the gross profit margin, the gross profit should be divided by the total revenue and then multiplied by 100. This is the percentage of money that the company makes from selling goods or services after subtracting the costs of producing them. The higher the percentage, the healthier the company’s profits are before the subtraction of overhead costs.
The gross profit can be calculated by subtracting the costs of goods and services sold from the total revenue. The costs of goods and services include employee wages, burden of labor, materials, contractors and any other cost of production. The gross profit percentage is an accurate indicator as to how efficient a company’s business is during the process of production. It also clarifies what percentage of a company’s earnings are available to pay for overheads and taxes, with the leftover being the company’s net profit.
To improve a gross profit percentage, a company can raise its prices for the goods or services it offers or do its best to cut the price of the production costs. However, this may lead to lower sales due to increased costs to customers or poorer quality goods or services. Companies must consider inflation, competition and the supply and demand of a product before increasing the cost of a product.