Gross profit is calculated by subtracting the cost of goods sold from sales. Businesses also use these two inputs to calculate gross profit margin, which expresses the relationship between gross sales and cost of goods sold as a percentage.
Keeping track of gross profit helps a business determine if it is making money at its current price markup level. The sales figure in the gross profit formula includes the total amount of income generated from the sale of goods and services over a specific time period. The cost of goods sold figure is the sum of the variable costs involved in producing the products and services sold over that same time period. Variable costs are expenses that change depending upon the quantity of product produced, such as the cost of raw materials and packaging.