Gross profit is what remains from revenue after subtracting the cost of goods sold (COGS). The formula is Gross Profit = Revenue − COGS. It measures how efficiently a company produces and sells its products, before operating expenses, interest, and tax come out.
What Is Gross Profit?
Gross profit measures profitability at the production level: total revenue minus the cost of goods sold (COGS). It shows how well a company turns the direct cost of its products into profit, before operating expenses. It's related to but distinct from total profit (which nets out every cost).
Gross Profit Formula
Gross Profit = Revenue − Cost of Goods SoldProfit before operating expenses
Worked example
A company sells 100 widgets at $10 each ($1,000 revenue), and the COGS to make them is $600:
$1,000 − $600 = $400 gross profitRevenue − COGS
COGS includes direct costs like raw materials, production labor, and manufacturing overhead — not rent, marketing, or admin salaries (those are operating expenses).
Gross Profit Margin
Gross profit as a percentage of revenue is the gross profit margin — useful for comparing companies of different sizes:
Gross Profit Margin = (Gross Profit ÷ Revenue) × 100Share of revenue kept after COGS
($400 ÷ $1,000) × 100 = 40%Worked example
A 40% margin means 40 cents of every revenue dollar is retained before operating costs.
Why Gross Profit Matters
- Profitability insight: a higher gross profit signals efficient cost management relative to revenue.
- Pricing strategy: thin margins flag a need to raise prices or cut production costs.
- Financial health: a steady or rising gross profit shows investors the core business is sound.
Gross Profit FAQ
How do you calculate gross profit?
Subtract the cost of goods sold from revenue: Gross Profit = Revenue − COGS. If revenue is $1,000 and COGS is $600, gross profit is $400.
What's the difference between gross profit and net profit?
Gross profit subtracts only COGS. Net profit (net income) subtracts everything else too — operating expenses, interest, and taxes — to reach the bottom line.
What's the difference between gross profit and gross margin?
Gross profit is a dollar amount (Revenue − COGS). Gross margin is that amount as a percentage of revenue, which makes it easier to compare across companies.
Is gross profit the same as revenue?
No. Revenue is total sales before any costs. Gross profit is what's left after subtracting the direct cost of producing those sales (COGS).
