What is the Gross Profit Percentage?

Gross profit percentage is a measure of profitability that calculates how much of every dollar of revenue remains after paying off the Cost of Goods Sold (COGS). In other words, it measures the efficiency of a company utilizing its input costs of production, such as raw materials and labor, to produce and sell its products profitably.

It can be seen as the percentage of sales that exceeds the direct costs associated with manufacturing the product. These direct costsDirect CostsDirect cost refers to the cost of operating core business activity—production costs, raw material cost, and wages paid to factory staff. Such costs can be determined by identifying the expenditure on cost objects.read more or COGSCOGSThe Cost of Goods Sold (COGS) is the cumulative total of direct costs incurred for the goods or services sold, including direct expenses like raw material, direct labour cost and other direct costs. However, it excludes all the indirect expenses incurred by the company. read more primarily consist of raw materials and direct labor. Therefore, calculating the gross  profit percentage formulaProfit Percentage FormulaThe profit percentage formula calculates the financial benefits left with the entity after it has paid all the expenses. Profit percentage is of two types - markup expressed as a percentage of cost price or profit margin calculated using the selling price.read more is done by dividing the gross profit by the total sales expressed in percentage terms.

Gross Profit Margin Formula

The gross profit percentage formula is represented as:

Gross Profit Percentage Formula = Gross Profit / Total Sales * 100%

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One can further expand it as,

Gross profit percentage formula = (Total sales – Cost of goods sold) / Total sales * 100%

After covering the cost of goods sold, the remaining money is used to service other operating expenses like selling/commission expenses, general, and administrative expensesAdministrative ExpensesAdministrative expenses are indirect costs incurred by a business that are not directly related to the manufacturing, production, or sale of goods or services provided, but are necessary for the smooth functioning of business operations, such as information technology, finance & accounts.read more, research and development, marketing expenses, and interest expense that appears further below in the income statement. The higher it is, the better it is for a company to pay off the business’s operating expenses.

Steps to Determine Gross Profit Percentage

One can do the calculation of the gross profit percentage formula by using the following steps: –

Gross Profit Percentage Examples

Let us understand the concept with the help of a simple example to understand it better.

  • Firstly, note the company’s total sales, easily available as a line item in the income statement. Next, gather the cost of goods sold directly from the income statement or compute the cost of goods sold by adding the direct manufacturing costs, such as raw materials, labor wages, etc. The gross profit is calculated by deducting the cost of goods sold from the total sales. Gross profit = Total sales – COGS Finally, it is calculated by dividing the gross profit by the total sales, as shown below. It is expressed in percentage, as the name suggests. Gross profit percentage formula = (Total sales – Cost of goods sold) / Total sales * 100%

Gross profit = Total sales – COGS

Example #1

Let us consider an example of XYZ Ltd. for calculating gross profit. XYZ Ltd. is in the business of manufacturing customized roller skates for both professional and amateur skaters. At the end of the financial year, XYZ Ltd. had earned $150,000 in total net sales and the following expenses.

As per the question, based on the below information, we will calculate the gross profit percentage for XYZ Ltd.

We will first use the above data to calculate the Cost of Goods Sold (COGS).

  • COGS = Labour wages + Raw materials expense + Factory rent= $50,000 + $25,000 + $5,000

Cost of Goods Sold= $80,000.

[Only those costs are taken in the computation of the cost of goods sold, which can be directly allocated to the production]

Now, we will calculate the gross profit by using the data given:

  • Gross profit = Total sales – COGS= $150,000 – $80,000

Gross profit = $70,000

Therefore, the calculation of the gross profit percentage for XYZ Ltd. will be: –

  • Gross Profit Percentage Formula = Gross Profit / Total Sales * 100%= $70,000 / $150,000 * 100%

XYZ Ltd.’s gross profit percentage for the year is as follows: –

XYZ Ltd.’s gross profit percentage for the year stood at 46.67%.

Example 2

Let us take the example of Apple Inc. For the gross profit percentage calculation of the fiscal yearFiscal YearFiscal Year (FY) is referred to as a period lasting for twelve months and is used for budgeting, account keeping and all the other financial reporting for industries. Some of the most commonly used Fiscal Years by businesses all over the world are: 1st January to 31st December, 1st April to 31st March, 1st July to 30th June and 1st October to 30th Septemberread more 2016, 2017, and 2018.

As per the annual reportsAnnual ReportsAn annual report is a document that a corporation publishes for its internal and external stakeholders to describe the company’s performance, financial information, and disclosures related to its operations. Over time, these reports have become legal and regulatory requirements.read more, the following information is available: –

Based on the information below, we will calculate Apple Inc. for 2016, 2017, and 2018.

  • Gross Profit for 2016 = Net Sales (2016) – Cost of Sales Cost Of SalesThe costs directly attributable to the production of the goods that are sold in the firm or organization are referred to as the cost of sales.read more (2016)= $215,639 – $131,376

  • Gross Profit for 2016 = $84,263Gross Profit for 2017 = $229,234 – $141,048

  • Gross Profit For 2017= $88,186Gross Profit for 2018 = $265,595 – $163,756

Gross Profit for 2018= $101,839

Now, we will calculate the gross profit percentage of Apple Inc. for 2016.

  • Gross Profit Percentage for 2016 = Gross Profit (2016) / Net Sales (2016) * 100%= $84,263 / $215,639 * 100%

Gross Profit Percentage for 2016= 39.08%.

Therefore, the calculation of the gross profit percentage of Apple Inc. for 2017 will be: –

  • Gross Profit Percentage for 2017 = $88,186 / $229,234 * 100%

Gross Profit Percentage for 2017= 38.47%.

Therefore, the calculation of the gross profit percentage of Apple Inc. for 2018 will be: –

  • Gross Profit Percentage for 2018 = $101,839 / $265,595 * 100%

Gross Profit Percentage for 2018 = 38.34%.

Therefore, the calculation of the gross profit percentage of Apple Inc. for 2016, 2017, and 2018 stood at 39.08%, 38.47%, and 38.34%, respectively.

Relevance and Uses

  • Understanding it is very important for an investor because it shows how profitable the company’s core business activities are without considering the indirect costsIndirect CostsIndirect cost is the cost that cannot be directly attributed to the production. These are the necessary expenditures and can be fixed or variable in nature like the office expenses, administration, sales promotion expense, etc.read more. An analyst can use this ratio to compare a company’s operating performance with other players within the same industry and sector, especially as an assessment metric. Also, companies use this ratio to indicate the financial benefit and viability of a particular product or service.Any money left after covering the cost of goods sold is used to pay off other operating expenses. The higher it is, the more the company saves on each dollar sales to service its additional operating costs and business obligations.Suppose a company can sustain higher gross profit margins than most of its peers. In that case, it has more efficient processes and more efficient operations, making it a safe long-term investmentTerm InvestmentLong Term Investments are financial instruments such as stocks, bonds, cash, or real estate assets that a company intends to hold for more than 365 days in order to maximize profits and are reported on the asset side of the balance sheet under the heading non-current assets.read more.On the other hand, if a company cannot earn an adequate gross profit percentage, it may be difficult for such a company to pay for its operating expenses Operating ExpensesOperating expense (OPEX) is the cost incurred in the normal course of business and does not include expenses directly related to product manufacturing or service delivery. Therefore, they are readily available in the income statement and help to determine the net profit.read more. As such, the gross profit percentage of a company should be stable unless and until some major changes are made to the business model.

Gross Profit Percentage Video

This article is a guide to Gross Profit Percentage and its definition. We discuss the calculation for gross profit percentage formula with practical examples. You may learn more about our articles below on accounting: –

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