what is gross profit 
gross profit is a company s profit after deducting the costs associated with producing and selling its products or services it s also known as sales profit or gross income gross profit is calculated on a company s income statement by subtracting the cost of goods sold cogs from total revenue it s important to note that gross profit differs from operating profit which is calculated by subtracting operating expenses from gross profit investopedia theresa chiechiformula for gross profitcalculating gross profitgross profit assesses a company s efficiency in using labor and supplies to produce goods or services unlike net income gross profit doesn t include fixed costs expenses that must be paid regardless of the output level fixed costs include items like rent advertising and insurance instead gross profit focuses on variable costs that fluctuate with production levels including under absorption costing which is required for external reporting under generally accepted accounting principles gaap a portion of fixed costs is assigned to each unit of production 1 for example if a factory produces 10 000 widgets and pays 30 000 in rent for the building a 3 cost would be attributed to each widget under absorption costing a company s gross profit will vary depending on whether it uses absorption or variable costing absorption costs include fixed and variable production costs in cogs which can lower gross profit variable costing includes only variable costs in cogs generally resulting in a higher gross profit since fixed costs are treated separately gross profit vs gross profit margingross profit calculates the gross profit margin a metric that evaluates a company s production efficiency over time it measures how much money is earned from sales after subtracting cogs showing the profit earned on each dollar of sales comparing gross profits year to year or quarter to quarter can be misleading since gross profits can rise while gross margins fall although the terms are similar gross profit differs from gross profit margin gross profit is expressed as a currency value while gross profit margin is a percentage the formula is gross profit margin revenue cost of goods sold revenue x 100gross profit vs net incomegross profit differs from net profit also known as net income while both are indicators of a company s financial health they serve different purposes gross profit is calculated by subtracting the cost of goods sold cogs from net revenue net income is calculated by subtracting all operating expenses from gross profit net income reflects the profit earned after all expenses while gross profit focuses solely on product specific costs gross profit helps evaluate how well a company manages production labor costs raw material sourcing and manufacturing spoilage net income assesses whether the operation is profitable including administrative costs rent insurance and taxes net income is often called the bottom line because it resides at the end of an income statement it refers to the company s total profit after accounting for all expenses including operating costs taxes and interest example of gross profitto calculate the gross profit we first subtract the cost of goods sold cogs from total revenue cogs totals 126 584 million while selling administrative and other fixed expenses aren t included subtract the cogs from revenue to obtain a gross profit of 151 800 126 584 25 216 millionto determine the gross profit margin divide the gross profit by total revenues for a margin of 25 216 151 800 16 61 most businesses have a gross profit margin that typically falls between 20 and 40 although this varies significantly by industry 2advantages of using gross profitgross profit isolates a company s performance of the product or service it is selling removing the noise of administrative or operating costs allows a company to think strategically about product performance and implement cost control strategies more effectively gross profit is also generally more controllable costs such as utilities rent insurance or supplies are unavoidable and relatively fixed while gross profit is dictated by net revenue and cost of goods sold this means a company can strategically adjust more elements of gross profit than it can for net profit limitations of using gross profitstandardized income statements prepared by financial data services may show different gross profits these statements display gross profits as a separate line item but they are only available for public companies investors reviewing private companies income should familiarize themselves with the cost and expense items on a non standardized balance sheet that may or may not factor into gross profit calculations while gross profit is a useful high level gauge companies often need to dig deeper to understand underperformance for example if a company s gross profit is 25 lower than its competitor s it should investigate all revenue streams and each component of cogs to identify the cause gross profit can also be misleading when analyzing the profitability of service sector companies for example a law office with no cost of goods sold will show a gross profit equal to its revenue while gross profit might suggest strong performance companies must also consider below the line costs when analyzing profitability 