DEFINITION

Gross profit can be calculated by subtracting the cost of making a product or service from the revenue generated from that selling that good or service.

FORMULA

Gross Profit = Revenue – Cost of Production

3 THINGS TO NOTE

1. To determine the ‘Cost of Production‘, this usually involves the use of variable values as opposed to fixed costs. Variable Costs are costs that change from month to month, depending on level of output. For example: volume of raw material bought. Fixed costs remain the same from month to month. For example: rent.
2. Gross Profit is not the same as Operating Profit or Net Profit
3. The Gross Profit metric is a good indicator of a company’s ability to efficiently utilise its available resources.