Gross Profit Calculator

Total Revenue ($)

Cost of Goods Sold (COGS) ($) Include direct costs like materials and direct labor.

Calculation Results:

Gross Profit: $0.00

Gross Profit Margin: 0%

How is Gross Profit Calculated?

Gross profit is a fundamental financial metric that shows the efficiency of a business in managing its labor and supplies during the production process. It represents the residual income after deducting the direct costs of production from the total sales revenue.

The Gross Profit Formula

To calculate gross profit, use the following simple subtraction formula:

            Gross Profit = Total Revenue – Cost of Goods Sold (COGS)
        

Understanding the Components

Total Revenue: This is the "top line" figure. It is the total amount of money generated from the sale of goods or services before any expenses are taken out.
Cost of Goods Sold (COGS): These are the variable costs directly tied to production. Examples include raw materials, shipping costs, and direct manufacturing labor. It does not include indirect costs like rent, insurance, or office salaries.

Example Calculation

Imagine a small furniture business. In one month, they sell 10 handmade tables for a total of $5,000 (Total Revenue). The wood, varnish, and hardware for those tables cost $1,500. The carpenter was paid $1,000 for the time spent building those specific tables.

COGS: $1,500 + $1,000 = $2,500

Gross Profit: $5,000 – $2,500 = $2,500

Gross Profit Margin: ($2,500 / $5,000) * 100 = 50%

Why Gross Profit Matters

Gross profit is the first checkpoint of profitability. If your gross profit is negative, your business model is likely unsustainable because you are spending more to create the product than you are earning from selling it. A healthy gross profit ensures there is enough money left over to cover "operating expenses" (like marketing, rent, and utilities) and eventually generate net income.